On March 2nd, a fire destroyed the entire inventory stored in a warehouse for the Madison, Inc. The following information is available from the records of the company's periodic inventory system: Beginning inventory 1/01/2020 $989,000 Purchases through 3/02/2020 $784,329 Sales through 3/02/2020 $1,345,789 Gross Profit Ratio 33% Estimate the cost of the inventory destroyed by the fire using the Gross Profit Method.

Madison, Inc.

The cost of the inventory destroyed by the fire using the Gross Profit Method is:

$871,650

Explanation:

a) Data and Calculations:

Beginning inventory 1/01/2020 = $989,000

Purchases through 3/02/2020 = $784,329

Sales through 3/02/2020 = $1,345,789

Gross Profit Ratio 33%

Gross profit = $444,110 ($1,345,789 * 33%)

Cost of goods sold = $901,679 ($1,345,789 - $444,110)

Cost of goods available for sale = $1,773,329 ($989,000 + $784,329)

Estimate of the cost of the inventory destroyed by the fire = cost of goods available for sale minus the cost of goods sold

= $871,650 ($1,773,329 - $901,679)

b) The estimate of the cost of the inventory destroyed by the fire is equal to the cost of the ending inventory.  It is obtained by subtracting the cost of goods sold from the cost of goods available for sale for the period.  The gross profit margin is the difference between the Sales Revenue and the Cost of goods sold.  When expressed as a percentage of Sales Revenue, the resulting figure is called the gross profit margin ratio.

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