Gross Profit Method

-it is necessary to know the approximate value of inventory when it is not possible to take a physical count, or even if the
physical count is possible, the same may prove costly, difficult or inconvenient at the amount.

What are the two procedures for approximating the value of inventory?
1. Gross profit method
2. Retail inventory method

What is GROSS PROFIT METHOD?

- Based on the assumption that the rate of gross profit remains approximately the same from period to period,
thus the ratio of cost of goods sold to net sales is relatively constant from period to period
- Calles GPR because the cost of sales is computed through the use of the gross profit rate

What is the basic formula under this method?

GOODS AVAILABLE FOR SALE
Less: COST OF SALES
ENDING INVENTORY

How to compute the cost of sales?

1. When the gross profit rate is based on sales: net sales multiplied by cost ratio
2. When the gross profit rate is based on cost: net sales divided by sales ratio

How to compute the gross profit rate?

- Is expressed as percent of sales or as percent of cost of goods sold
- If GPR based on sales, just divided the gross profit by the sales
- If GPR is based on COS, just divide the gross profit by the COS
- GPR on sales is naturally lower than based on cost which create a favorable impression on the part of the
customers
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How to convert the GPR from one basis to the other?
-from based on cost to based on sales: GRP on cost/sales ratio
-from based on sales to based on cost: GRP on sales/cost ratio