9-1

Inventory EstimationGross Profit Method

Chapter 9Illustrated Solution: Problem 9-32Illustrated Solution: Problem 9-32

9-2

Problem BackgroundProblem Background

Fire has destroyed all inventory and many accounting records.

Using available information, determine the inventory loss suffered as a result of the fire.

Assumption: The gross profit percentage from past years (1999-2001) is a reasonable estimate of the gross profit percentage for 2002 up to the fire.

9-3

Gross Profit Percentage (Estimate)Gross Profit Percentage (Estimate)

Average gross profit on sales: Gross profitSales

= Gross profit on sales percentage

9-4

Gross Profit Percentage (Estimate)Gross Profit Percentage (Estimate)

1999 2000 2001

= 30% = 26% = 34%$ ,$ ,187 800626 000

$ ,$ ,

183 300705 000

$ ,$ ,

231200680 000

Average gross profit on sales: Gross profitSales

= Gross profit on sales percentage

9-5

Gross Profit Percentage (Estimate)Gross Profit Percentage (Estimate)

Average gross profit percentage: 0.30 + 0.26 + 0.34 = 0.90

0.90 ÷ 3 = 0.30 or 30%

1999 2000 2001

= 30% = 26% = 34%$ ,$ ,187 800626 000

$ ,$ ,

183 300705 000

$ ,$ ,

231200680 000

Average gross profit on sales: Gross profitSales

= Gross profit on sales percentage

9-6

Sales for 2002Sales for 2002

Collections on accounts receivable (January 1 – August 13) $753,800

Add: Accounts receivable at August 13 128,890

9-7

Sales for 2002Sales for 2002

Collections on accounts receivable (January 1 – August 13) $753,800

Add: Accounts receivable at August 13 128,890

Deduct: Accounts receivable at January 1 (130,590)

Estimated Sales $752,100

9-8

Cost of Goods Sold for 2002Cost of Goods Sold for 2002

Collections on accounts receivable (January 1 – August 13) $753,800

Add: Accounts receivable at August 13 128,890

Deduct: Accounts receivable at January 1 (130,590)

Estimated Sales $752,100

Average cost percentage last 3 years (1.00 – 0.30 = 0.70) x 0.70

Estimated cost of goods sold for January 1 – August 13 $526,470

9-9

Inventory, January 1 $143,850

Add: Purchases

Payments to suppliers $487,500

Accounts payable to suppliers at August 13 122,850

Goods Available for SaleGoods Available for Sale

9-10

Inventory, January 1 $143,850

Add: Purchases

Payments to suppliers $487,500

Accounts payable to suppliers at August 13 122,850

Deduct: Accounts payable to suppliers, January 1 (88,140) $522,210

Estimated goods available for sale 666,060

Goods Available for SaleGoods Available for Sale

9-11

Inventory, January 1 $143,850

Add: Purchases

Payments to suppliers $487,500

Accounts payable to suppliers at August 13 122,850

Deduct: Accounts payable to suppliers, January 1 (88,140) $522,210

Estimated goods available for sale 666,060

Estimated cost of goods sold 526,470

Ending InventoryEnding Inventory

9-12

Inventory, January 1 $143,850

Add: Purchases

Payments to suppliers $487,500

Accounts payable to suppliers at August 13 122,850

Deduct: Accounts payable to suppliers, January 1 (88,140) $522,210

Estimated goods available for sale 666,060

Estimated cost of goods sold 526,470

Estimated ending inventory at August 13 $139,590

Ending InventoryEnding Inventory

9-13

Net Inventory Loss from FireNet Inventory Loss from Fire

Inventory, January 1 $143,850

Add: Purchases

Payments to suppliers $487,500

Accounts payable to suppliers at August 13 122,850

Deduct: Accounts payable to suppliers, January 1 (88,140) $522,210

Estimated goods available for sale 666,060

Estimated cost of goods sold 526,470

Estimated ending inventory at August 13 $139,590

Less: Inventory out on consignment 52,900

Net loss of inventory from fire $86,690

9-14

End of ProblemEnd of Problem