Estimation of Fire Loss
Response to the following problem:
On January 20, 2011, the records of the Stewart Company revealed the following information:
Inventory, July 1, 2010 $ 53,600 Purchases discounts taken $5,800
Purchases, July 1, 2010-January 20, Sales,2011 368,000 Freight-in 3,800
July 1, 2010-January 20, 2011 583,000 Sales returns 6,600
Purchases returns 11,200
A fire destroyed the entire inventory on January 20, 2011 except for purchases in transit, FOB shipping point of $6,000, and goods having a selling price of $4,700 that were salvaged from the fire. The salvaged goods had an estimated salvage value of $2,900. The average gross profit on net sales in previous periods was 40%.
Required
1. Compute the cost of the inventory lost in the fire.
2. If a company discloses that it uses a periodic inventory system, what concerns might you have about its interim financial statements?