Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 95

Use gross profit ratio to calculate inventory loss Franklin Co. has experienced gross profit ratios for 2010, 2009, and 2008 of 33%, 30%, and 31%, respectively. On April 3, 2011, the firm’s plant and all of its inventory were destroyed by a tornado. Accounting records for 2011, which were available because they were stored in a protected vault, showed the following:

Sales from January 1 thru April 2	$142,680
January 1 inventory amount	63,590
Purchases of inventory from
January 1 thru April 2	118,652

Required:

Calculate the amount of the insurance claim to be filed for the inventory destroyed in the tornado. (Hint: Use the cost of goods sold model and a gross profit ratio that will result in the largest claim.)

Step 1 of 2

Calculate inventory loss by using gross profit ratio:

Consider the following information:

Additionally, Gross profit ratio for the financial years 2008, 2009, and 2010 are 31%, 30% and 33% respectively.