Question

On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available: Sales, January 1 through July 8 $690,000 Inventory, January 1 140,000 Purchases, January 1 through July 8 655,000 Gross profit ratio 20%What is the estimated inventory on July 8 immediately prior to the fire?

Answer 1

To estimate the inventory on July 8 immediately prior to the fire, we need to calculate the cost of goods sold (COGS) from January 1 to July 8. The estimated inventory is $220,000.

Step-by-step explanation:

To estimate the inventory on July 8 immediately prior to the fire, we need to calculate the cost of goods sold (COGS) from January 1 to July 8. The formula for COGS is:

COGS = Beginning Inventory + Purchases - Ending Inventory

Given that the gross profit ratio is 20%, we can calculate the cost of goods sold:

COGS = $690,000 - ($690,000 / (1 + 0.2)) = $575,000

To estimate the ending inventory, we can use the COGS formula:

Ending Inventory = Beginning Inventory + Purchases - COGS

Given that the beginning inventory is $140,000 and the purchases are $655,000, we can calculate the ending inventory:

Ending Inventory = $140,000 + $655,000 - $575,000 = $220,000

Therefore, the estimated inventory on July 8 immediately prior to the fire is $220,000.

Answer 2

The answer is $243,000

Step-by-step explanation:

The inventory on July 8 immediately prior to the fire is the CLOSING INVENTORY.

To find this closing inventory, we need to find the gross profit first and then cost of sales.

To find gross profit:

Gross profit margin=gross profit ÷sales.

Gross profit margin is 20% or 0.2

Sales is $690,000

Therefore, gross profit is:

0.2 x $690,000

=$138,000

To find cost of sales:

Gross profit = sales - cost of sales.

Gross profit is $138,000

Sales is $690,000

Therefore, cost of sales is

$690,000 - $138,000

=$552,000.

And finally to get closing inventory:

Cost of sales = opening inventory + purchases - closing inventory.

Cost of sales = $552,000

Opening inventory = $140,000

Purchases = $655,000

Closing inventory = $140,000+$655,000-$552,000

=$243,000.