Chapter 6, Problem 20E

(a)

To determine

Gross profit method: It is one of the simplest methods for inventory valuation and it also helps in errors detection. In it, value of ending inventory is calculated by the application of gross profit rate on the net sales of the company.

Gross Profit Rate: It is the financial ratio that evaluates the money left out of the total revenues after deducting the cost of goods sold. Thus, it shows the relationship between the gross profit on sales and net sales.

To determine: The inventory lost in the fire when beginning inventory is $20,000 and gross profit rate is 30%.

(b)

To determine

The inventory lost in the fire when beginning inventory is $30,000 and gross profit rate is 40%.