Gross Profit Method
On July 23, the company’s inventory was destroyed in a hurricane related flood. For insurance purposes, the company must reliably estimate the amount of inventory on hand on
July 23. The company uses a periodic inventory system. The following data have been assembled:
|
Inventory, January 1 |
$1,000,000 |
|
Purchases, January 1–July 23 |
3,700,000 |
|
Sales, January 1–July 23 |
5,000,000 |
|
Historical gross profit percentages: |
|
|
Last year |
60% |
|
Two years ago |
55% |
Estimate the company’s inventory as of July 23 using (1) last year’s gross profit percentage and (2) the gross profit percentage from two years ago.