Chapter 9 Discussion -2 - 1. What is gross profit method?...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1. What is gross profit method? What are the major uses of the gross profit method? The gross profit method is a technique used to estimate the amount of ending inventory. The technique could be used for monthly financial statements when a physical inventory is not feasible. (However, it is no substitute for an annual physical inventory.) It is also used to estimate the amount of missing inventory caused by theft, fire or other disaster. Here’s how the gross profit method works. First it is necessary to determine the gross profit percentage (gross profit margin) that a company is currently experiencing. For example, if a retailer buys its merchandise for $0.70 and sells the merchandise for $1.00, it has a gross profit of $0.30. The gross profit of $0.30 divided by the selling price of $1.00 means a gross profit margin of 30% of sales. This also means that the retailer’s cost of goods sold is 70% of sales. Next, compute the sales value of the merchandise sold since the last time an inventory amount was known. Let’s assume that the sales amounted to $100,000. Given the sales value of $100,000 the cost of the goods sold should be approximately $70,000 (70% from above times $100,000). Add the cost of the goods purchased since the last inventory to that inventory amount. Let’s assume that previous inventory amount was $15,000 and that there were purchases of $75,000. That means the cost of goods that were available for sale totals $90,000 ($15,000 + $75,000). Since the estimated cost of goods sold was $70,000 (from above), the estimated cost of goods in inventory should be approximately $20,000 ($90,000 minus $70,000). This result is indicative of reality and that the resulting amount is an estimate. 2.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/13/2009 for the course ACCOUNTING ACCTG 50 taught by Professor B during the Fall '09 term at University of Phoenix.

Page1 / 3

Chapter 9 Discussion -2 - 1. What is gross profit method?...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online