Question

California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2021. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1, 2021, $300,000; sales and purchases from January 1, 2021, to May 1, 2021, $1,300,000 and $875,000, respectively. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2021, is:

Answer 1

The answer is: $395,000

Step-by-step explanation:

To calculate the May 1 inventory we have to determine the cost of all goods available for sale:

goods available for sale = beginning inventory + net purchases

goods available for sale = $300,000 + $875,000 = $1,175,000

Then we must determine the cost of goods sold:

COGS = net sales - (net sales x gross profit margin)

COGS = $1,300,000 - ($1,300,000 x 40%) = $1,300,000 - $520,000 = $780,000

Finally to calculate the May 1 inventory:

May 1 inventory = goods available for sale - COGS = $1,175,000 - $780,000 = $395,000