How to Compute Loss Inventory in a Fire Using the Gross Profit Method

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Companies may use the gross profit method for estimating inventories only on their interim financial statements. Gross profit method is not allowed for annual financial statements because it is only a general estimate. When something happens that destroys inventory, it is important to update inventory estimates to keep track of how much inventory remains.

Determine sales and cost of goods sold for the company. Sales and cost of goods sold is on the company's income statement. Say, for example, that a company has $150,000 in sales and $70,000 in cost of goods sold, when a fire destroyed all its inventory.

Divide cost of goods sold by sales to determine the cost of goods sold percentage. This percentage also equals 1 minus the gross profit percentage. In the example, $70,000 divided by $150,000 equals about 46 percent.

Multiply the cost of goods sold percentage by total sales to determine cost of goods sold. In the example, $150,000 times 46 percent equals $70,000.

Add beginning inventory and purchases to determine the cost of goods available for sale. In the example, if beginning inventory was $150,000 and purchases were $125,000, then cost of goods available for sale equals $275,000.

Subtract cost of goods sold from cost of goods available for sale to determine the amount of inventory destroyed. In our example, $275,000 minus $70,000 equals $205,000 of inventory destroyed by the fire.