The estimated inventory on July 8 immediately prior to the fire is A. $221,400.
How is the estimated inventory determined?The estimated inventory can be determined by first calculating the cost of goods sold from the gross profit margin.
The margin of the cost of goods sold to the sales is 80% (1 - 20%). This margin is applied to the sales revenue to obtain the dollar value.
The cost of goods available for sale can be found using the beginning inventory plus purchases or the cost of goods sold and ending inventory.
Sales, January 1 through July 8 = $697,000
Inventory, January 1 = $131,000
Purchases, January 1 through July 8 = $648,000
Cost of goods available for sale = (Purchases + Beginning Inventory)
= $779,000 ( $131,000 + $648,000)
Gross profit ratio = 20%
Cost of goods sold ratio = 80% (1 - 20%)
Cost of goods sold = $557,600 ($697,000 x 80%)
Cost of goods sold = Cost of goods available for sale - Ending inventory
Estimated ending inventory = Cost of goods available for sale - Cost of goods sold
= $221,400 ($779,000 - $557,600)
Thus, the ending inventory before the fire was $221,400.
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