On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available: Sales, January 1 through July 8 $690,000 Inventory, January 1 140,000 Purchases, January 1 through July 8 655,000 Gross profit ratio 20%What is the estimated inventory on July 8 immediately prior to the fire?

The answer is $243,000

Explanation:

The inventory on July 8 immediately prior to the fire is the CLOSING INVENTORY.

To find this closing inventory, we need to find the gross profit first and then cost of sales.

To find gross profit:

Gross profit margin=gross profit ÷sales.

Gross profit margin is 20% or 0.2

Sales is $690,000

Therefore, gross profit is:

0.2 x $690,000

=$138,000

To find cost of sales:

Gross profit = sales - cost of sales.

Gross profit is $138,000

Sales is $690,000

Therefore, cost of sales is

$690,000 - $138,000

=$552,000.

And finally to get closing inventory:

Cost of sales = opening inventory + purchases - closing inventory.

Cost of sales = $552,000

Opening inventory = $140,000

Purchases = $655,000

Closing inventory = $140,000+$655,000-$552,000

=$243,000.

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