SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 13
Subject:

INTERMEDIATE ACCOUNTING 1 (AE15-IA1)

AISAT COLLEGE – DASMARIÑAS, INC.

This material has been developed in support to the Senior High School Program
implementation. Materials included in this module are owned by the respective copyright
holders. AISAT College – Dasmariñas, the publisher and author do not represent nor claim
ownership over them.
This material will be reproduced for educational purposes and can be modified for the
purpose of translation into another language provided that the source must be clearly
acknowledged. Derivatives of the work including creating an edited version, enhancement or a
supplementary work are permitted provided all original works are acknowledged and the
copyright is attributed. No work may be derived from this material for commercial purposes and
profit.

INFORMATION SHEET PR-13.1.1

 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |2

“GROSS PROFIT METHOD &

RETAIL INVENTORY METHOD”

Use of estimate in inventory valuation

In many cases, it is necessary to know the approximate value of inventory when it is not possible to take
a physical count.

Even if the physical count is possible, the same may prove costly, difficult or inconvenient at the
moment.

There are two widely accepted procedures for approximating the value of inventory, namely the gross
profit method and the retail inventory method.

The approximation or estimation of inventory is made for varied reasons.

The most common reasons for making an estimate of the cost of the goods on hand are:

a. The inventory is destroyed by fire and other catastrophe, or theft of the merchandise has occurred
and the amount of inventory is required for insurance purposes.

b. A physical count of the goods on hand is made and it is necessary to prove the correctness or
reasonableness of such count by making an estimate.

This is known as the “gross profit test” in the accounting parlance.

c. Interim financial statements are prepared and a physical count of the goods on hand is not necessary
because it may take time to do the same.

Moreover, only an estimate is required to fairly present the financial position and financial performance
of the entity for interim reporting purposes.

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |3

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |4

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |5

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |6

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |7

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |8

Sales allowance and sales discount

Sales allowance and sales discount are ignored, that is, not deducted from sales.

The reason is that while these items decrease the amount of sales, they do not affect the physical
volume of goods sold.

Sales allowance and sales discount do not increase the physical inventory of goods, unlike in sales return
where there is an actual addition to goods on hand.

To deduct sales allowance and sales discount from sales would result to overstatement of inventory
with a consequent understatement of cost of goods sold and overstatement of gross income

Why overstate inventory when there is no addition to physical inventory created by sales allowance and
sales discount?

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |9

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 10

“RETAIL INVENTORY METHOD”

The retail inventory method is the other method of estimating the value of inventory:

PAS 2, paragraph 22, provides that this method is often used in the retail industry for measuring
inventory of large number of rapidly changing items with similar margin for which it is
impracticable to use other costing method.

In other words, the retail inventory method is generally employed by department stores,
supermarkets and other retail concerns where there is a wide variety of goods.

This is so because keeping track of unit cost at all times is difficult.

The retail inventory method came to its name because the selling price or retail price is tagged
to each item.

The term "retail" simply means selling price.

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 11

Treatment of items

a. Purchase discount - deducted from purchases at cost only.

b. Purchase return —deducted from purchases at cost and at retail.
c. Purchase allowance —deducted from purchases at cost only,
d. Freight in — addition to purchases at cost only.
e. Departmental transfer in or debit — addition to purchases at cost and at retail.
f. Departmental transfer out or credit — deduction from purchases at cost and retail.
g. Sales discount and sales allowance — disregarded, meaning, not deducted from sales.
h. Sales return — deducted from sales.

If the account is “sales return and allowance”, the same should be deducted from sales.

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 12

i. Employee discounts — added to sales.

Employee discounts are special discounts usually not recorded because they are directly
deducted from the sales price.

Only the net sales price is recorded. Consequently, the amount of sales is understated.
Thus, the employee discounts are added back to sales.

j. Normal shortage, shrinkage, spoilage, breakage — This is deducted from goods

available for sale at retail.

Any normal shortage is usually absorbed or included in cost of goods sold.

k. Abnormal shortage, shrinkage, spoilage, breakage

This is deducted from goods available for sale at both cost and retail so as not to distort
the cost ratio.

Any abnormal amount is reported separately as loss.

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 13

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 14

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 15

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 16

References:

• Intermediate Accounting – 2020 Edition Volume 1

Author: Conrado T. Valix; Jose F. Peralta; Christian Aris M. Valix

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 17

STUDENT NAME: __________________________________ SECTION: __________________

WRITTEN WORK PR-13.1.1

WRITTEN WORK TITLE: : GROSS PROFIT METHOD AND RETAIL INVENTORY METHOD

WRITTEN WORK OBJECTIVE: After completing this written work, you will have an understanding of the
difference between gross profit method and retail inventory method.
TOOLS AND MATERIALS: Modules

EQUIPMENT : none

ESTIMATED COST : none

PROCESS / PROCEDURE:

Directions:
Answer the following questions.

1. What is net realizable value?

2. Explain the accounting for inventory write-down.
3. What are the necessary disclosures with respect to inventory?
4. Explain the “normal” computation of cost of goods sold.
5. Explain the computation of cost of goods sold under the gross profit method.
6. Explain the treatment of sales allowance and sales discount in relation to the gross profit method.

Required :
1. Tasks must be neat and presentable.
2. Avoid erasures.

PRECAUTIONS : •Avoid copy and paste performance task of other

ASSESSMENT METHOD : Equivalent to 30points.

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “GROSS PROFIT METHOD & RETAIL INVENTORY METHOD”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 18

STUDENT NAME: _____________________________________ SECTION: ___________

WRITTEN OUTPUT CRITERIA CHECKLIST PR-13-1.1

Did I … CRITERIA SCORING
1 2 3 4 5
1. Logic and key points. All ideas are logically presented.
2. Content. Content of the essay flows and is passionate.
3. Cleanliness. Very clean and well presented.
4. Spelling and Grammar. No error in spelling and grammar.
5. Word usage. Word choice and usage are professionals.

GRADES

Teacher’s Remarks □ Quiz □ Recitation □ Project

5 - Excellently Written
4 - Very Satisfactory Written
3 - Satisfactory Written
2 - Fairly Written
1 - Poorly Written

SUBJECT TEACHER: APPROVED FOR

13th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 13 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director