Case StudyGiridhar hbibb Company

Case Overview

• Warehouse of Giridhar Clothing Company destroyed in fire on May 7

• Inventory was last taken on March 31. Following information was
available from the March 31 financial statements:
•

• Merchandise inventory 17200

• Amounts due to suppliers for purchases 4200
• Amounts due from customers 2900
• The following information was available for the current period:
•

• Paid purchase invoices 62100

• Unpaid purchase invoices 11000
• Paid sale invoices 96200
• Unpaid sale invoices 3500
•

• Paid freight invoices 2700

• Unpaid freight invoices 400
• Cheques issued to pay suppliers 64800
• Cheques issued for cash purchases 8100
• Paying in slips for deposits into banks 97400
1.
Since the closing inventory on May 7 as per the average gross profit of
past two years comes at Rs. 13640, this will be the inventory present in
the warehouse at the time of fire. The insurance company estimated
the salvage value to be Rs. 500, so the cost of inventory destroyed in
fire:
Cost of inventory destroyed = Closing stock- Inventory salvaged
= 13640 - 500
= ₹ 13140

So, cost of inventory destroyed = ₹ 13140

2.
Since the insurance company has estimated the damaged stock as well
as the salvaged stock at Rs. 500 each, so the total closing stock
according to the insurance company is Rs. 1000. This leaves the gross
profit to 7300. So the implicit Gross Profit Ratio as per the insurance
company is:
Gross Profit Ratio = (Gross Profit/Net Sales) x 100
= (7300/99700) x 100
= 7.32%
3.
When the sales price increases by 2%, the total sales rise by 2%. This
leads to an increase in estimated gross profit and a decrease in
estimated closing stock. This will lower the claim towards the insurance
company.