CASE STUDY

GIRIDHAR CLOTHING COMPANY

Submitted by : Ashish Singh Bhadauria

Class: MBA IB-1st sem(2019-21)
 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. Prepare an estimate of the cost of inventory destroyed in the fire.

Trading Account
Particulars ₹ Particulars ₹
By Sales
-paid 96200
To opening stock 17200 -unpaid 3500 99700
To Freight
-paid 2700
-unpaid 400 3100 By Closing Stock 13640
To purchases
-paid 62100
-unpaid 11000 73100
To Gross Profit (@20% of Sales) 19940
113340 113340
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. What was the %age in the Gross Profit implicit in the insurance
company’s proposed settlement?

Trading Account
Particulars Rs. Particulars Rs.
By Sales
-paid 96200
To opening stock 17200 -unpaid 3500 99700
To Freight
-paid 2700
-unpaid 400 3100 By Closing Stock 1000
To purchases
-paid 62100
-unpaid 11000 73100
To Gross Profit (@7.32%) 7300
100700 100700
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. Discuss the changes when selling price went up by 2 % during the
current period.
Trading Account
Particulars ₹ Particulars ₹
By Sales
-paid 98124
To opening stock 17200 -unpaid 3570 101694
To Freight
-paid 2700
-unpaid 400 3100 By Closing Stock 12044.8
To purchases
-paid 62100
-unpaid 11000 73100
To Gross Profit (@20% of Sales) 20338.8
113738.8 113738.8
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.