Question

Friendly Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2016. In preparing its insurance claim on the Inventory loss, the company developed the following data: inventory January 1, 2016, $340,000; sales and purchases from January 1, 2016, to May 1, 2016, $1,160,000 and $885,000, respectively. California consistently reports a 30% gross prom. The estimated inventory on May 1. 2016. is:
a. $473,000.
b. $414,400.
c. $378,000.
d. $413,000.

Answer 1

Answer:

d. $413,000

Explanation:

Sales                                                                               = $1,160,000

Less: Cost of Goods Sold (1,160,000*70%)                  = ($812,000)

Gross Profit                                                                     = 348,000

Note: Since gross profit margin is 30% of the sales, the cost of goods sold must be 70% of sales.

Beginning inventory on Jan.1, 2016                             = $340,000

Purchase inventory from Jan.1, 2016 to May 1,2016   =  $885,000

Total Inventory                                                              =  $1,225,000

Less: Cost of Goods sold                                              =  ($812,000)

Estimated Inventory on May.1 2016                            =   $413,000