Gross profit is the difference between sales and cost of goods sold, which is the difference between the cost of goods available for sale and the ending inventory. Companies typically do a physical inventory count once at the end of the year. However, if fire, flood or some other catastrophe damages your warehouse, you may need to estimate the ending inventory balance to file an insurance claim.
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1.
Obtain the beginning inventory and purchases during the period. The beginning inventory is the ending inventory of the previous period, which you can obtain from the current assets section of the previous period's balance sheet. Use supplier invoices, sales receipts, electronic records and other documents to get the purchase amount during the period.
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2.
Add the purchases to the beginning inventory to calculate the cost of goods available for sale. For example, if the beginning inventory is $1 million and purchases are another $1 million, the cost of goods available for sale is $2 million.
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3.
Estimate the gross profit margin for the current period. Start with the gross profit margin of the previous year and adjust it by a couple of percentage points depending on current business conditions. The gross profit margin is the ratio of gross profit to sales, expressed as a percentage. Gross profit is the difference between sales and cost of goods sold, which means that cost of goods sold is the sum of sales and gross profit.
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4.
Determine the cost of goods sold, which is the difference between sales and gross profit. Continuing with the example, if the gross profit margin is 40 percent and sales are $500,000, then the gross profit is $200,000 (0.4 x $500,000) and the cost of goods sold is $300,000 ($500,000 - $200,000).
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5.
Subtract the cost of goods sold from the cost of goods available for sale to estimate the ending inventory. This is the lost inventory if the catastrophe has caused extensive damage to your warehouse and you have to replace the entire inventory. Continuing with the example, the estimated ending inventory is $1.7 million ($2 million - $300,000).
If the catastrophe has caused partial damage, do a physical count of the inventory and subtract it from the estimated ending inventory to get the lost inventory. To continue with the example, if a physical inventory count reveals $400,000 worth of inventory on hand, the lost inventory is equal to $1.3 million ($1.7 million - $400,000).
