Most companies use the formula of gross profit method as a way to estimate their inventory according to their provisional financial statements. The gross profit method is not preferred in using for the company’s annual financial statements as it is just a general estimate. If something unexpected happens which results in loss inventory, inventory estimates are important to keep account of to know just how much inventory remains after an unforeseen event.
How to Calculate Loss Inventory in a Fire
The first step will be to determine the sales and cost of goods sold (COGS) of the business. You will get the figures of sales and cost of goods sold from the company’s income statement. To give an example, we will use a company that has $70,000 in their cost of goods sold and $150,000 in sales when a fire wrecked and destroyed their entire inventory.
The next step is to divide the cost of goods sold by sales. The answer will show the percentage of the cost of goods sold. Another way to calculate this percentage is by subtracting 1 from the gross profit percentage. Take an example for this. $80,000 divided by $160,000 equals to 50%.
Next, calculate the loss inventory by multiplying the cost of goods sold percentage with the total sales. This will give us the figure for the cost of goods sold. As an example, $160,000 multiplied by 50% equals $80,000.
Then, add the beginning inventory and purchases. This will give the figure for the cost of goods available for sale. Lets take an example of this scenario. If the beginning inventory is found to be 150,000, the figure for purchases calculates to $125,000. According to the calculations, the cost of goods available for sale will be $275,000.
After that, subtract the cost of goods sold from the cost of goods available for sale. The figure will be the amount of inventory that has been destroyed in the fire. For example, $275,000 minus $80,000 equals $195,000 which is the amount of inventory destroyed because of the fire.
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