Problem:
Harangue Company is a large retail furniture company which operates in two adjacent warehouses. One of the warehouses is a showroom, and the other is used to store merchandise. On the Night of April 20, 2007, a fire broke out in the storage warehouse and destroyed the merchandise stored there. Fortunately, the fore did not reach the showroom, so all of the merchandise on display was spared.
Although the company maintained a perpetual inventory system, its records were rather haphazard, and the last reliable physical inventory had been taken on December 31. In addition, there was no control of the flow of goods between the showroom and the warehouse. Thus, it was impossible to tell what goods should have been in either place. As a result, the insurance company required an independent estimate of the amount of loss. The insurance company examiners were satisfied when they received the following information:
Merchandise inventory on December 31, 2006 $ 727,400
Purchases, January 1 to April 22, 2007 1,206,100
Purchase returns, January 1 to April 22, 2007 (5,353)
Freight-in, January 1 to April 22, 2007 26,550
Sales, January 1 to April 22, 2007 1,979,525
Sales returns, January 1 to April 22, 2007 (14,900)
Merchandise inventory in showroom on April 22, 2007 201,480
Average gross margin 44%
A. Prepare a schedule that estimates the amount of the inventory lost in the fire.
B. What are some other reasons management might need to estimate the amount of inventory?