Lisa school supplies suffred a fire loss. The company needs to estimate the cost of good destroyed. Beginning inventory was 100,000 purchases totaled 600,000 and sales came equaled 1,000,000. Lisa normal gross profit percentage is 40%. What is the estimated cost of the inventory lost in the fire using gross profit method?
To estimate the cost of the inventory lost using the gross profit method, you need to calculate the gross profit and apply it to the sales amount.
Step 1: Calculate the cost of goods sold (COGS):
COGS = Beginning Inventory + Purchases - Ending Inventory
Given:
Beginning Inventory = $100,000
Purchases = $600,000
Sales = $1,000,000
We need to calculate the Ending Inventory to determine the COGS.
Ending Inventory = Beginning Inventory + Purchases - COGS (which is unknown)
Step 2: Calculate the Gross Profit:
Gross Profit = Sales - COGS
Step 3: Identify Lisa's normal gross profit percentage:
Lisa's normal gross profit percentage = 40%
Now, let's calculate:
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $100,000 + $600,000 - Ending Inventory
Gross Profit = Sales - COGS
40% of Sales = Sales - COGS
Substituting the values:
0.40 * $1,000,000 = $1,000,000 - COGS
Simplifying the equation:
COGS = $1,000,000 - (0.40 * $1,000,000)
COGS = $1,000,000 - $400,000
COGS = $600,000
Now, let's substitute the COGS value back into the equation to find the Ending Inventory:
$600,000 = $100,000 + $600,000 - Ending Inventory
Simplifying the equation and isolating the Ending Inventory:
$600,000 - $100,000 - $600,000 = - Ending Inventory
-$100,000 = - Ending Inventory
The minus signs cancel out:
$100,000 = Ending Inventory
Therefore, the estimated cost of inventory lost in the fire using the gross profit method is $100,000.