Estimating Inventory Using Gross Profit Method Wood's warehouse burned down on April 1 of Year 4. The following information (up to the date of the fire) was taken from the Year 4 records of the company: inventory, January 1, $60,000; gross sales, $320,000; purchases, $180,000; sales returns (restored to inventory), $10,000; purchase returns and allowances, $4,000; and freight-in, $16,000. The cost of goods sold and gross profit for the past three years follow. Year Cost of Goods Sold Gross Profit Year 1 Year 2 Year 3 $1,000,000 920,000 1,000,000 $250,000 240,000 240,000 Required a. Estimate the cost of the inventory destroyed in the fire, using the average gross profit percentage for the past three years. • Note: Assume no inventory was salvagable. • Note: Do not use negative signs with any of your answers. Average gross profit percentage for the past three years: 0 % COGAS COGS, estimated $ 0 Ending inventory loss $ b. Our estimate in part a would be questionable in all of the following cases except for: The average gross profit percentage for the past three years is not representative of the current year. The mix of the products has changed. The overall average is not representative of the goods classified by markups. The gross profit percentage for Year 5 is expected to decrease. The actual amounts from the records are inaccurate. Next >
Estimating Inventory Using Gross Profit Method Wood's warehouse burned down on April 1 of Year 4. The following information (up to the date of the fire) was taken from the Year 4 records of the company: inventory, January 1, $60,000; gross sales, $320,000; purchases, $180,000; sales returns (restored to inventory), $10,000; purchase returns and allowances, $4,000; and freight-in, $16,000. The cost of goods sold and gross profit for the past three years follow. Year Cost of Goods Sold Gross Profit Year 1 Year 2 Year 3 $1,000,000 920,000 1,000,000 $250,000 240,000 240,000 Required a. Estimate the cost of the inventory destroyed in the fire, using the average gross profit percentage for the past three years. • Note: Assume no inventory was salvagable. • Note: Do not use negative signs with any of your answers. Average gross profit percentage for the past three years: 0 % COGAS COGS, estimated $ 0 Ending inventory loss $ b. Our estimate in part a would be questionable in all of the following cases except for: The average gross profit percentage for the past three years is not representative of the current year. The mix of the products has changed. The overall average is not representative of the goods classified by markups. The gross profit percentage for Year 5 is expected to decrease. The actual amounts from the records are inaccurate. Next >
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Estimating Inventory Using Gross Profit Method
Wood's warehouse burned down on April 1 of Year 4. The following information (up to the date of the fire) was taken from the Year 4 records of the company: inventory,
January 1, $60,000; gross sales, $320,000; purchases, $180,000; sales returns (restored to inventory), $10,000; purchase returns and allowances, $4,000; and freight-in,
$16,000. The cost of goods sold and gross profit for the past three years follow.
Year Cost of Goods Sold Gross Profit
Year 1
Year 2
Year 3
$1,000,000
920,000
1,000,000
$250,000
240,000
240,000
Required
a. Estimate the cost of the inventory destroyed in the fire, using the average gross profit percentage for the past three years.
• Note: Assume no inventory was salvagable.
• Note: Do not use negative signs with any of your answers.
Average gross profit percentage for the past three years: 0
%
COGAS
COGS, estimated
$
0
Ending inventory loss $
b. Our estimate in part a would be questionable in all of the following cases except for:
The average gross profit percentage for the past three years is not representative of the current year.
The mix of the products has changed.
The overall average is not representative of the goods classified by markups.
The gross profit percentage for Year 5 is expected to decrease.
The actual amounts from the records are inaccurate.
Next >
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