A fire destroyed a warehouse of the Goren Group, Inc., on May 4, 2021. Accounting records on that date indicated the following:
Merchandise inventory, January 1, 2021 $1,980,000
Purchases to date 5,880,000
Freight-in 480,000
Sales to date 9,000,000
The gross profit ratio has averaged 20% of sales for the past four years.
Required:
1. Use the gross profit method to estimate the cost of the inventory destroyed in the fire.

Cost of inventory destroyed in fire is $1,140,000

Explanation:

The loss from fire to inventory can be calculated by finding the cost of the inventory on the may 4 , 2021.

Cost of sales = Sales – profit on sales

= 9000000-1800000

=$7200000

The value of inventory on the may 4 = opening inventory on January 1 + purchases + freight in – cost of sales

=1980000+5880000+480000-7200000

=$1,140,000

Cost of sales is referred to the amount that is incurred in producing the goods. Cost of sales is included in the sale price of the product to earn a profit beyond the cost. So sales includes cost and profit which can be used to find the cost of sales.

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