INVENTORY

ESTIMATION:
GP Method
Why make an estimate of
Inventory?
◎ Inventory is destroyed by fire and other
catastrophe, or theft of merchandise and the
amount of inventory is required for
insurance purposes
◎ Necessary to prove the correctness or
reasonableness of a physical count
2 PROCEDURES:
◎ RETAIL INVENTORY
METHOD

◎ GROSS PROFIT METHOD

◎ Based on the assumption that the rate of
gross profit remains approximately the same
from period to period, and

◎ Therefore, the ratio of cost of goods sold to

net sales is relatively constant from period to
period.

◎ Used in the retail industry for measuring

inventory of large number of rapidly changing
items with similar margin

◎ Retail means selling price

BASIC FORMULA
Goods available for sale (GAS)
Less: Cost of goods sold
Ending Inventory
 xx
(xx)
xx

GOODS AVAILABLE FOR

SALE (GAS)
COST OF GOODS SOLD
SALES ALLOWANCE
and SALES DISCOUNTS
IGNORED;
NOT DEDUCTED FROM
SALES !!!

Thanks!
Any questions?