On March 17, 2021, a flood destroyed the entire inventory of Beatty Co. The following information is available from its accounting records: Inventory, January 1, 2021 $ 208,000 Purchases, Jan. 1 — Mar. 17 420,000 Sales, Jan. 1 — Mar. 17 600,000 Normal gross margin 40% Required: Compute the estimated cost of inventory lost in the flood.

The estimated cost of inventory lost in the flood is the entire ending balance which is $388,000

Explanation:

The gross profit is the difference between the sales revenue and the cost of good sold.

The gross profit percentage is the ratio of gross profit to net sales expressed as a percentage.

Net sales is the sales less returns and allowances. Similar to net sales is net purchases which is the gross purchase net the allowances and returns.

Cost of sales = 0.4 *$600,000

= $240,000

The movement in the balance of inventory at the start and end of a period is as a result of sales and purchases. While sales reduces the balance in inventory, purchases increases the balance. This may be expressed mathematically as

Opening balance + purchases - cost of goods sold = closing balance

$208,000 + $420,000 - $240,000 = Ending balance

Ending balance = $388,000

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