Gross Profit Method: Estimation of Theft Loss

You are requested by a client on September 28 to prepare an insurance claim for a theft loss that occurred on that day. You immediately take an inventory and obtain the following data:

Inventory, September 1	$38,000
Sales, September 1September 28	51,000
Purchases, September 1September 28	19,000

The inventory on September 28 indicates that an inventory of $15,000 remains after the theft. During the past year, net sales were made at 50% above the cost of goods sold.

Required:

1. Compute the inventory lost during the theft. Round the gross profit percentage to 3 decimal places.

Beginning inventory
Purchases
Cost of goods available for sale
Cost of goods sold
Ending inventory before the theft
Ending inventory after theft
Inventory lost

2. What concerns might you have about the inventory estimation under the gross profit method?

The gross profit method assumes that the gross profit percentage from the previous period(s) is (applicable, not applicable ) to the current period. Using this percentage assumes that there ( has not been any charge, has been charges) in the relationship between gross profit and net sales, due to, for example, cost or productivity changes. Also, if the company uses a single gross profit percentage, it is assuming that all inventories are held in the (same, different ) proportion.