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Gross Profit Method: (Estimating Inventory)

The document describes the gross profit method for estimating inventory value when a physical count is not possible. It assumes the gross profit rate remains consistent over time. The basic formula takes goods available for sale and subtracts cost of sales to get ending inventory. Goods available come from beginning inventory plus purchases less returns/allowances. Cost of sales is either net sales multiplied by the cost ratio or net sales divided by the sales ratio depending on if the gross profit rate is based on sales or cost. Two examples are provided to illustrate the calculations.

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Jo Malaluan
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84 views

Gross Profit Method: (Estimating Inventory)

The document describes the gross profit method for estimating inventory value when a physical count is not possible. It assumes the gross profit rate remains consistent over time. The basic formula takes goods available for sale and subtracts cost of sales to get ending inventory. Goods available come from beginning inventory plus purchases less returns/allowances. Cost of sales is either net sales multiplied by the cost ratio or net sales divided by the sales ratio depending on if the gross profit rate is based on sales or cost. Two examples are provided to illustrate the calculations.

Uploaded by

Jo Malaluan
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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GROSS PROFIT

METHOD
(ESTIMATING INVENTORY)
• In many cases, it is necessary to know the
approximate value of inventory when it is not
possible to take a physical count or even if the
physical count is possible, the same may prove
costly, difficult or inconvenient at the moment.
GROSS PROFIT METHOD

• Based on the assumption that the rate of gross profit


remains approximately the same from period to period
and therefore the ratio of cost of goods sold to net sales is
relatively constant from period to period.
BASIC FORMULA FOR GROSS PROFIT
METHOD

Goods Available for Sale xx


Less: Cost of Sales xx
Ending Inventory xx
GOODS AVAILABLE FOR SALE
• The usual items affecting the goods available for sale are:
Beginning Inventory xx
Purchases xx
Add: Freight in xx
Total xx
Less: Purchase return, allowance and discount xx xx
Goods Available for Sale xx
COST OF SALES

The cost of sales is computed as follows:


• Net sales multiplied by cost ratio- this is used when the
gross profit rate is based on sales.
• Net sales divided by sales ratio- this is used when the
gross profit rate is based on cost.
ILLUSTRATIVE EXAMPLE:
Beginning inventory 100,000
Note: if the
Net purchases 500,000 gross profit rate
Net sales 700,000 of 40% is based
Gross profit rate based on sales 40% on sales,
The ending inventory is computed as follows: arithmetically,
Beginning inventory 100,000
net sales would
be 100% and
Net purchases 500,000
therefore, the
Goods available for sale 600,000 cost ratio is 60%
Less: cost of sales
Net sales 700,000
multiply by cost ratio 60% 420,000
Ending inventory 180,000
ILLUSTRATIVE EXAMPLE

Beginning inventory 200,000


Net purchases 1,000,000 Note: if the
Net sales 1,260,000 gross profit rate
is based on
Gross profit rate based on cost 40%
cost,
The ending inventory is computed as follows:
arithmetically,
Beginning inventory 200,000 cost of sales
Net purchases 1,000,000 would be 100%
Goods available for sale 1,200,000 and therefore,
Less: cost of sales the sales ratio
Net sales 1,260,000
or percent of
140% sales is 140%
divided by cost ratio 900,000
Ending inventory 300,000
• GROSS PROFIT RATE ON SALES is computed by
dividing the amount of gross profit by the net sales.
• GROSS PROFIT RATE ON COST is computed by
dividing the gross profit by the cost of goods sold.
EXERCISE:
Inventory, beginning 600,000
Purchases 2,530,000
Purchase return 15,000
Purchase allowance 5,000
Purchase discount 10,000
Freight in 50,000
Sales 3,100,000
Sales return 100,000
Sales allowance 50,000
Sales discount 150,000
The ending inventory is computed under each of the following assumptions:
1. Gross profit rate is 25% on sales
2. Gross profit rate is 25% on cost

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