Tips on Inventory Gross Profit and Retail Methods

Tips on Inventory Gross Profit and Retail Methods - Tips on...

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Tips on Inventory –Gross Profit and Retail Methods Gross Profit Method TIP: Gross profit is synonymous with gross margin. TIP: The gross profit percentage (expressed as a percentage of selling price) and the cost of goods sold percentage(also expressed as a percentage of selling price) are complements; that is, they sum to 100%. When the gross profit method of inventory estimation is used and the gross margin is expressed in terms of cost, the gross margin must first be expressed in terms of selling price before you can proceed with the compuations. One method of conversion is to memorize and use the following formula: Gross Margin on Selling Price = Percentage Markup on Cost 100% + Percentage markup on cost Another approach to deriving this formula is shown below. It uses the familiar formula: Sales – Cost of Goods Sold = Gross Profit(GP) Example: If GP = 25% of cost, then cost of goods sold is 100%. Putting this much information into our formula above, Sales – 100% = 25% Therefore, Sales = 125%. Expressing GP as a percentage of Sales we get 25% /125% = 20%. Thus, gross profit = 20% of sales. TIP: Gross profit on selling price will always be less than gross profit expressed as a percentage of cost. TIP: The terms gross margin percentage, gross profit percentage, rate of gross profit, and percentage of markup are thought of to be synonymous, although companies more commonly use the term markup in referring to a relationship to cost and then use the term gross profit in referring to sales. TIP: The gross profit(gross margin) method only provides an estimate of inventory cost. The method is deficient in that it uses past percentages in determining the markup and the markup is usually not uniform for all items in inventory. The method is normally unacceptable for financial reporting purposes (except for interim reports.) The method is useful in estimating inventory when the inventory has been destroyed and for verifying the reasonableness of inventory amounts determined by other
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This note was uploaded on 12/03/2009 for the course ACG 3131 taught by Professor Rotella during the Spring '08 term at University of Central Florida.

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Tips on Inventory Gross Profit and Retail Methods - Tips on...

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