Hello, Could someone help me solve question#5 here. Thank you! Required a. Determine the amount of inventory loss from the hurricane. b. Do you feel the insurance company’s approach is fair? Explain in detail with supporting calculations.

STANISLAW CORPORATION
Computation of Inventory Fire Loss
April 15, 2018
Inventory, 1/1/18			$ 75,000
Purchases, 1/1/ – 3/31/18			52,000
April merchandise shipments paid			3,400
Unrecorded purchases on account			15,600
Total			146,000
Less: Shipments in transit		$ 2,300
Merchandise returned		950	3,250
Merchandise available for sale			142,750
Less estimated cost of sales:
Sales revenue, 1/1/ – 3/31/18		135,000
Sales revenue, 4/1/ – 4/15/18
Receivables acknowledged
at 4/15/15	$46,000
Estimated receivables not
acknowledged	8,000
Total	54,000
Add collections, 4/1/ – 4/15/15
($12,950 – $950)	12,000
Total	66,000
Less receivables, 3/31/18	40,000	26,000
Total sales 1/1/ – 4/15/18		161,000
Less gross profit (45%* X $161,000)		72,450	88,550
Estimated merchandise inventory on hand at the time of the fire			54,200
Less: Sale of salvaged inventory			3,500
Net Amount of Inventory Lost in Fire			$ 50,700
Important: you must subtract $3,500 received from the sale of salvaged inventory. Therefore, the loss after the $3,500 received for salvaged inventory sold, is the net loss of $50,700. *See the following page for the gross profit calculation and an expanded analysis as to whether the insurance company’s approach is fair.

Computation of Gross Profit Rate by Insurance Company
Net sales, 2016			$390,000
Net sales, 2017			530,000
Total net sales			920,000
Beginning inventory		$ 66,000
Net purchases, 2016		235,000
Net purchases, 2017		280,000
Total		581,000
Less: Ending inventory		75,000	506,000
Gross profit			$414,000
Gross profit rate ($414,000 ÷ $920,000)			45%

Important Question: Is the Insurance Company’s Approach Fair?

Gross Profit Analysis Broken Down by Each Year

2016 2017

Beginning Inventory $ 66,000 $ 50,000

+ Purchases 235,000 280,000

= Total Available 301,000 330,000

- Ending Inventory ( 50,000) ( 75,000)

= Cost of Goods Sold $251,000 $255,000

Net Sales $390,000 $530,000

Less Cost of Goods Sold (251,000) (255,000)

Gross Profit and GP% $139,000 35.64% $275,000 51.89%

Notice: the significant improvement in the gross profit percentage during 2017. In addition, notice the significant increase in sales. The 2017 year ended just a few months before the fire on April 15, 2018, therefore, the most relevant gross profit percentage to use for the fire loss calculation should be the 51.89% calculated above for 2017, as opposed to averaging the two years as the insurance company has done.

Calculation of Inventory Loss Based on 2017 Gross Profit Rate of 51.59%

Sales 1/1/ - 4/15 (from prior page) $161,000 Inventory Available (from prior page) $142,750

Less 2017 GP 51.89% x $161,000 ( 83,543) Less Cost of Goods Sold 1/1/ - 4/15 ( 77,457)

Cost of Goods Sold 1/1/ - 4/15 $ 77,457 Inventory on Hand at Time of Fire $ 65,293

Less Sale of Salvaged Inventory ( 3,500)

Inventory Loss $ 61,793

Conclusion: Insurance company’s approach of using a two-year average gross profit rate, undervalues the estimated loss by $11,093 ($61,793 using 2017 vs. $50,700 as determined on the previous page using a two year overall average gross profit rate of 45%).