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Less time consuming two popular methods of estimating

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Less time-consuming Two popular methods of estimating ending inventory are the . . . 1. Gross profit method 2. Retail inventory method
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9-12 Inventory Estimation Techniques Used… To determine the cost of inventory that has been lost, destroyed, or stolen. To estimate inventory and cost of goods sold for interim reports and avoid the expense of a physical inventory count. By auditors to test the overall reasonableness of inventory amounts reported by clients. In budgeting and forecasting.
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9-13 The gross profit method can be used to estimate cost of goods sold and ending inventory when sales are known. Gross profit on selling price is used to estimate gross profit and then calculate cost of goods sold and ending inventory. Beginning inventory (from the accounting records) Plus: Net purchases (from the accounting records) Goods available for sale Less: Cost of goods sold (estimated) Ending Inventory (estimated) Gross Profit Method This method assumes that the historical gross profit ratio is reasonably constant in the short-run. This method assumes that the historical gross profit ratio is reasonably constant in the short-run.
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9-14 Example: Hokie Corp. has a beginning inventory of $140,000 and purchases of $380,000, both at cost. Sales at selling price amount to $540,000. The gross profit on selling price is 25 percent. Hokie applies the gross profit (margin) method as follows. Gross Profit Method Beginning inventory (from records) 140,000 $ Plus: Net purchases (from records) 380,000 Goods available for sale 520,000 Less: Cost of goods sold: Net Sales 540,000 $ Less: Estimated gross profit (25% x $540,000) 135,000 Estimated cost of goods sold (405,000) Estimated ending inventory 115,000 $
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9-15 Computation of Gross Profit Percentage Gross Profit on Selling Price = Percentage markup on Cost 100% + Percentage markup on Cost = 20% Gross Profit on Selling Price Gross Profit on Selling Price is needed to use the Gross Profit Method. The following formula can be used to convert Markup on Cost to Gross Profit on Selling Price : If Gross Profit is 25% of Cost, then Gross Profit on Selling Price = 20%.
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9-16 The Retail Inventory Method Developed for retail operations like department stores. Uses both the retail value and cost of items for sale to calculate a cost to retail percentage.
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