Help with a test question

**Sir_Froggy** · 07-20-2005, 10:51 AM

ok so this question I've been looking at for awhile now and still can't get. If someone could explain this to me that'd be awesome

Fitzerald Corp. uses a periodic inventory system. At the beginning of 1998 its inventory balanec was $25,000. During the first 4 months of 1998, net purchases amounted to $325,000 and net sales were $400,000. On May 1, 1998, a fire destroyed the company's warehouse and its entire inventory. The average gross profit percentage in recent years had been 30%. What is the estimated amount of Fitzgerald's inventory loss on May 1, 1998?

they say the answer is $60,000 but I have no idea how to get there. except one way which doesn't make any sense.

TIA

**Merlin** · 07-20-2005, 12:04 PM

Yeah, I'm struggling with this one a little. They start with 25 and buy 325 for a total of 350. Of that they sold 400 with a cost of 70%. That is inventory with a cost of 280 (400*0.7). 350-280=inventory on hand for the fire. So it sounds to me like the answer should be 70.

**Grimm** · 07-20-2005, 12:26 PM

Ok, to see how much inventory was sold we need to out how much the $400,000 of sales cost the company. So we need to solve for costs where costs is the value of expened invertory.
We know that sales = 400,000.
We know that sales = gross + costs
We know that gross = (0.3)sales
sales = (0.3)sales + costs
sales - (0.3)sales = costs
$400,000 - (0.3)$400,000 = costs
$400,000 - $120,000 = costs
$280,000 = costs

So with a cost = $280,000 we can determine that:
$325000 + $25000 - $280000 = value of inventory
$70,000 = value of inventory

So, obviously, I have no clue.
Of course... we didn't account for labor, taxes and rent...