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Gross Profit Method

The document discusses the gross profit method for estimating inventory using beginning inventory, net purchases, net sales, and cost of goods sold. There are two ways to calculate cost of goods sold - based on sales or based on cost. Two sample problems are shown calculating ending inventory using both methods. The gross profit rate can be calculated on either sales or cost. Net sales are defined as gross sales less any returns, discounts or allowances.

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186 views4 pages

Gross Profit Method

The document discusses the gross profit method for estimating inventory using beginning inventory, net purchases, net sales, and cost of goods sold. There are two ways to calculate cost of goods sold - based on sales or based on cost. Two sample problems are shown calculating ending inventory using both methods. The gross profit rate can be calculated on either sales or cost. Net sales are defined as gross sales less any returns, discounts or allowances.

Uploaded by

Chuckay Sealed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Inventory Estimation - Gross Profit Method Gross Profit Rate

based on sales based on cost


Net Sales 100,000 100% 133% *Cost of Sales
Less: Cost of Sales* 75,000 75% 100% MI, beg
Gross Profit 25,000 25% 33% Add: Net Purchases
Total Goods Available for Sale
Gross Profit Rate Less: MI, end (squeezed)
-based on sales Cost of Sales
-based on cost

Sample Problem 1:
MI, beg 100,000
Net Purchases 500,000
Net Sales 700,000
Gross Profit Rate based on sales 40%
based on sales based on cost
Net Sales 700,000 100% 140%
Less: Cost of Sales* 420,000 60% 100%
Gross Profit 280,000 40% 40%

*Cost of Sales *Cost of Sales


MI, beg 100,000 MI, beg
Add: Net Purchases 500,000 Add: Net Purchases
Total Goods Available for Sale 600,000 Total Goods Available for Sale
Less: Cost of Sales 420,000 Less: Cost of Sales
Estimated MI, end 180,000 Estimated MI, end

Cost of Sales Computation:


-based on sales:
COS = Net Sales x cost ratio

-based on cost:
COS = Net Sales / sales ratio

Sample Problem 2:
MI, beg 200,000
Net Purchases 1,000,000
Net Sales 1,260,000
Gross Profit Rate based on cost 40%
based on cost based on sales
Net Sales 1,260,000 140% 100%
Less: Cost of Sales* 900,000 100% 60%
Gross Profit 360,000 40% 40%

*Cost of Sales
MI, beg 200,000 MI, beg
Add: Net Purchases 1,000,000 Add: Net Purchases
Total Goods Available for Sale 1,200,000 Total Goods Available for Sale
Less: Cost of Sales 900,000 Less: Cost of Sales
Estimated MI, end 300,000 Estimated MI, end

based on sales based on cost


Net Sales 1,000,000 100% 133%
COS 750,000 75% 100%
Gross Profit 250,000 25% 33%

GP rate on cost 25%

Net Sales 125%


COS 100%
Gross Profit on cost 25%

Gross Profit rate on sales 20%

Net Sales 100%


COS 80%
Gross Profit on sales 20%

Gross Profit on cost 25%

Net Sales Computation for the purpose of computing estimated MI, end:

Sales xx
Less: Sales return xx
Sales discount xx ignored
Sales allowances xx xx ignored
Net Sales xx
xx
xx
xx
xx
xx

500,000

100,000
500,000
600,000
500,000
100,000

756,000
200,000
1,000,000
1,200,000
756,000
444,000

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