On November 21, 2021, a fire at Hodge Company’s warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $12,000. The following information was available from the records of Hodge’s periodic inventory system:           Inventory, November 1 $ 100,000   Net purchases from November 1, to the date of the fire   140,000   Net sales from November 1, to the date of the fire   220,000     Based on recent history, Hodge’s gross profit ratio on Product Tex is 35% of net sales.   Required: Calculate the estimated loss on the inventory from the fire, using the gross profit method.

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.