It is Monday morning. You heard on the morning news that a client of your public accounting firm, Kearns and Associates, had a fire the previous Friday night that destroyed its office and warehouse, and you concluded that inventory records as well as inventory probably perished in the fire. Since you had been at Kearns on the previous Friday preparing the monthly income statement for the previous month that ended on Thursday, you realize you probably have the only current financial information available for Kearns. Upon arrival at your firm's office, you meet your partner, who confirms your suspicions.
Kearns and Associates lost its entire inventory and its records. She tells you that the company wants your firm to prepare information for a fire loss claim for Kearns's insurance company for the inventory.
You know the audit file for the fiscal year that ended three months earlier contains a complete section dealing with inventory and the four product lines Kearns carried, including the most recent gross margin rate for each line. The file will show total inventory and how much inventory there was by product line at year end. You also recall that the file contains an analysis of sales by product line for the past several years and that Kearns used a periodic inventory system.
Required
Explain how you would use the information available to you to calculate the fire loss by product line.