Share
Explore BrainMass

# Amount of inventory lost in the fire

Please explain the equation and steps to find the number.

Headstrong Hardware lost most of its inventory in an electrical fire that destroyed the company's warehouse and retail store. Fortunately, the accounting records were backed up on the owner's computer in her home office and could, therefore, be recovered. However, Headstrong uses the periodic inventory system, so without being able to perform a physical count, the company could not determine the amount of inventory that was lost in the fire. In order to process the insurance claim, the insurance company requires Headstrong to prepare a reasonable estimate of the lost inventory.

As Headstrong's accountant, you have been able to gather the following information:

According to last year's income statement, sales last year were \$966,000.
According to the accounting records, the company's sales during the current year, up to the time of the fire, totalled \$682,000.
According to last year's income statement, the cost of goods sold last year was \$598,060.
According to the accounting records, the company's purchases during the current year, up to the time of the fire, totalled \$493,000.
According to last year's balance sheet, the ending inventory at the end of last year was \$89,000.

Required:

Prepare an estimate of the amount of inventory lost in the fire. \$_____________

#### Solution Preview

We use the gross profit method
Using last year records, the cost of goods sold as a percentage of sales is ...

#### Solution Summary

The solution explains how to estimate the amount of inventory lost in the fire

\$2.19