CHAPTER 13: GROSS PROFIT METHOD Conversion of Gross Profit Rate

Gross profit rate on Gross profit rate on

Basic formula under the gross profit sales to cost cost to sales
method If the gross profit on If the gross profit on
Goods available for sale (GAS) XX sales is 20%: cost is 25%
Net Sales 100% 125%
Less: Cost of goods sold (COGS) XX
COGS 80% 100%
Ending inventory XX Gross profit 20% 25%
Before
Goods available for sale Gross profit (20/80) = 25% (25/125) = 20%
Beginning inventory XX After
Notes Net sales is 100% COGS is 100%
Purchases XX
because it is the basis because it is the basis
Add: Freight in XX of the gross profit. of the gross profit.
Total XX
Less Purchase ret., XX XX
allowances, and discount Sales Allowance and Sales Discount
Goods available for sale XX ● Are ignored
● If deducted it would result to:

➗
Cost of Goods Sold o Overstated of Inventory
Net sales x Cost Net sales Sales o Understatement of COGS
Ratio ratio o Overstatement of Profit
If gross profit rate If gross profit rate
based on sales: based on cost:

xx% + 100% =xx% xx% ➗100% = xx%

Computation of Gross Profit Rate
Gross profit rate Gross profit rate on
on sales cost

Gross profit
Net sales
➗ Gross profit
COGS
➗
Percentages
Gross profit rate Gross profit rate
based on sales based on cost
Net sales 100% COGS 100%