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Inventory Estimation Method

This document discusses inventory estimation methods that are used when an actual physical inventory count is impossible, impractical, or needed to validate inventory figures. It describes the gross profit method and retail inventory method. The gross profit method estimates inventory values based on the relationship between gross profit and sales, assuming gross profit rates remain consistent. The retail inventory method estimates inventory costs by applying a cost-to-retail ratio to ending retail values, using beginning and ending retail amounts. The document provides illustrations of each method and discusses the treatment of various inventory-related accounts.

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krisha millo
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612 views14 pages

Inventory Estimation Method

This document discusses inventory estimation methods that are used when an actual physical inventory count is impossible, impractical, or needed to validate inventory figures. It describes the gross profit method and retail inventory method. The gross profit method estimates inventory values based on the relationship between gross profit and sales, assuming gross profit rates remain consistent. The retail inventory method estimates inventory costs by applying a cost-to-retail ratio to ending retail values, using beginning and ending retail amounts. The document provides illustrations of each method and discusses the treatment of various inventory-related accounts.

Uploaded by

krisha millo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INVENTORY ESTIMATION

METHOD

Necessary when:

 Impossible to count due to catastrophes or theft

 Impractical due to interim reporting

 To validate inventory figures determined through physical count

Methods in Estimating Inventory Value


Gross Profit Method

Relationship between GP & Sales or GP & COGS


Assumption:

The GP rate remains approximately the same from period to period

The ration of cost of sales to net sales is relatively constant every


accounting period

Use Usually applied in estimating):

Inventory at reporting date

Missing inventory

Inventory loss due to catastrophe

Illustration:

INVENTORY ESTIMATION METHOD 1


Sales allowance and sales discount are disregarded in computing "net sales"
because no physical inventory movement

Illustration:
Inventory, Beg P50,000
Purchases P100,000
GP rate 25% based on sales
Sales P80,000

Another scenario kapag may na-save na inventory:

Darna saved P25,000 worth of goods wherein:


15,000 – ok

10,000 – damaged
2,500 – NRV

How much is the burned goods?

INVENTORY ESTIMATION METHOD 2


Illustration 2

Inventory, Beginning P200,000


Purchases P500,000

Purchase Returns & Allowances P2,000


Purchase Discount P3,000

GP rate based on sales 20%

Sales 500,000
Sales Returns 20,000

Sales Discounts 30,000


Sales Allowance 5,000

INVENTORY ESTIMATION METHOD 3


Retail Inventory Method

Know the "retail" or "selling prices"

Assumption:

Large number of rapidly changing items have similar margin for which it
is impracticable to use other costing method

Use (applied in validating inventory figures through physical count as in the


case of:

Department stores

Supermarkets

Convenience stores

Other retail concerns where there is a wide variety of goods

INVENTORY ESTIMATION METHOD 4


Find Cost to Retail Ratio:

Classifications:

 Average Method: everything is included

 FIFO Method: No beginning inventory

 Conservative/Conventional/Lower of Cost or Net Realizable Value: No Net


markdown

 FIFO Conservative: No beginning and net markdown

Same ending inventory at retail, but sale at retail is not so compute COGS as
your difference between TGAS

Marks

Treatment of Items

 Purchase Discount

 Purchase Return

 Purchase Allowance

INVENTORY ESTIMATION METHOD 5


 Freight In

 Department transfer-in Debit)

 Departmental transfer-out Credit)

 Sales Discounts and Allowances

 Sales Returns

 Employee Discounts → after computing ratio (+) normally di nirerecord or ang


treatment sakanya is parang trade discount

 Normal losses → after computing ratio (+)

 Abnormal losses → before computing ratio (-)

Illustration:

INVENTORY ESTIMATION METHOD 6


INVENTORY ESTIMATION METHOD 7
NO ENTRY Pag kuha lang ng COGAS/TGAS

Cost

Mark

Retail

PAFI PD Purchase Allowances, Freight-in, Purchase Discount)

NED SR Sales returns, Employee Discount, Normal losses)

Hindi din kasama sa pagcompute ng COGAS

Illustration:

INVENTORY ESTIMATION METHOD 8


If naisama si Sales Discount and Allowances sa problem or binigay na yung net
sales need i-reverse yung effect niya

INVENTORY ESTIMATION METHOD 9


INVENTORY ESTIMATION METHOD 10
INVENTORY ESTIMATION METHOD 11
INVENTORY ESTIMATION METHOD 12
INVENTORY ESTIMATION METHOD 13
INVENTORY ESTIMATION METHOD 14

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