ch6-appendix

ch6-appendix - Chapter 6 Appendix For interim financial...

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Unformatted text preview: Chapter 6 Appendix For interim financial statements, we may need to estimate ending inventory and cost of goods sold. Or when it is impossible to take a physical count of ending inventory. The Gross Profit Method Determine cost of goods Determine cost of goods Determine available for sale. available for sale. Estimate cost of goods Estimate cost of goods Estimate sold by multiplying the net sold by multiplying the net sales by the cost ratio. sales by the cost ratio. Deduct cost of goods sold Deduct cost of goods sold Deduct from cost of goods from cost of goods available for sale to available for sale to determine ending determine ending i t The Gross Profit Method In March of 2006, Matrix Company’s In March of 2006, Matrix Company’s inventory was destroyed by fire. Matrix inventory was destroyed by fire. Matrix normal gross profit ratio is 30% of net normal gross profit ratio is 30% of net sales. At the time of the fire, Matrix sales. At the time of the fire, Matrix showed the following balances: showed the following balances: Sales $ 31,500 Sales returns 1,500 Beginning Inventory 12,000 Net cost of goods purchased 20,500 The Gross Profit Method Estimating Inventory The Gross Profit Method Goods Available for Sale: Beginning Inventory Net cost of goods purchased Goods available for sale Less estimated cost of goods sold: Sales $ 31,500 Less sales returns (1,500) Net sales $ 30,000 Estimated cost ofof goods sold Estimated cost goods sold Estimated March inventory loss The Retail Method The retail method of estimating inventory requires The retail method of estimating inventory requires that management determine the value of ending that management determine the value of ending inventory at retail prices. inventory at retail prices. In March of 2006, Matrix Company’s inventory was In March of 2006, Matrix Company’ inventory was Company’s destroyed by fire. At the time of the fire, Matrix’s destroyed by fire. At the time of the fire, Matrix’ Matrix’s management collected the following information: management collected the following information: Information for Matrix Company The Retail Method Goods available for sale at cost Goods available for sale at retail Physical count of ending inventory priced at retail $ 32,500 50,000 22,000 Step 1 $ 12,000 20,500 $ 32,500 Step 2 Step 3 × 70% (21,000) $ 11,500 The Retail Method Matrix would follow the steps below to estimate Matrix would follow the steps below to estimate their ending inventory using the retail method. their ending inventory using the retail method. Estimating Inventory The Retail Method a b c d e Goods available for sale at cost Goods available for sale at retail Cost ratio [a ÷ b] Physical count of ending inventory priced at retail Estimated ending inventory at cost [ c × d] $ 32,500 50,000 65% 22,000 $ 14,300 ...
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This note was uploaded on 05/04/2011 for the course STAT 1301 taught by Professor Smslee during the Spring '08 term at HKU.

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