Estimating Inventory Losses
Take a look at Exercise-9A, page #382. David Patel is at home, enjoying a good Seattle Mariner baseball game (hard to believe I know) when he receives a call telling him that his store has burned from the Fire Chief when he picks up the telephone in the kitchen while grabbing a snack. The big question is,what is his ending inventory loss?
Well, we know that beginning inventory + net purchases - ending inventory = cost of goods sold. And, we know that sales - cost of goods sold = gross margin.
For Patel, Sales = $450,000, and his gross margin was 40%, or, $180,000. Therefore, cost of goods sold must be $450,000 - $180,000, or $270,000.
Then, beginning inventory + net purchases - cost of goods sold = ending inventory.
So, $45,000 + $280,000 + $13,700 - $270,000 = Ending inventory = $68,700 (!)
Pretty simple? Or what? You can use these relationships to answer a problem like #5, on page #295.
On the Groh Brothers (Problem #5), you will need to derive the ending inventory, and then separate that total from the remaining inventory left in the showroom that was not destroyed.
Please post your solutions to the discussion list.