On April 8, 2010, a flood destroyed the warehouse of Stuco Distributing Co. From

Question

On April 8, 2010, a flood destroyed the warehouse of Stuco Distributing Co. From the waterlogged records of the company, management was able to determine that the firm's gross profit ratio had averaged 37% for the past several years and that the inventory at the beginning of the year was $52,700. It also was determined that during the year until the date of the flood, sales had totaled $107,100 and purchases totaled $69,780.

On April 8, 2010, a flood destroyed the warehouse of Stuco Distributing Co. From the waterlogged records of the company, management was able to determine that the firm's gross profit ratio had averaged 37% for the past several years and that the inventory at the beginning of the year was $52,700. It also was determined that during the year until the date of the flood, sales had totaled $107,100 and purchases totaled $69,780.

Explanation / Answer

Gross profit ratio expresses relationship between gross profit and net sales. It is obtained by dividing gross profit by net sales and expressing this relationship as a percentage. Gross profit is obtained by deducting cost of goods sold from net sales.

SO GP Ratio = (Net Sales-COGS)/Net Sales = 37%

ie (Net Sales-COGS) = 37%*Net Sales

ie COGS = 63%*Net Sales = 63%*107,100 = 67473

Now COGS = (Op Inv+Purch - Closing Inv)

ie 67473= 52,700+ 69,780-Cloing Inv

ie Closing Inv = 67473 - 52,700 -69,780= -$55007

SO amount of Inventory Loss = CLosing Inv = $55007

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