Inventory Estimation

Gross Profit Method

Retail Method
 When do we estimate inventory ?
• We Estimate Inventory when Inventory
Records are lost.
 Gross Profit Method
Gross Profit Rate on Sales Gross Profit Rate on Cost
Sales 100 Sales 100
Cost of Goods Sold (80) Cost of Goods Sold (80)
Gross Profit 20 Gross Profit 20

20/100 ( sales ) 20/80 ( cost of goods sold )

20% gross profit rate on sales 25% gross profit rate on cost
Converting GP Rate on Cost to GP Rate on
Sales

0.25
1 + 0.25
= 20%
 Example:
Sales : P 500,000
Gross Profit Rate : 25% of sales
Beginning Inventory : P500,000
Purchases : P 250,000

Question : How much is the Ending Inventory ?

 Solution :
100% - 25 % GP Rate on Sales = 75 % Cost Ratio

P500,000 (sales) x 75 % = P 375,000 Cost of Goods Sold

Beginning Inventory: P 500,000

Purchases: 250,000
Cost of Goods Available for Sale P750,000
Less: Cost of Goods Sold 375,000
Ending Inventory P 375,000
Sales : P 500,000
Gross Profit Rate : 25% of cost
Beginning Inventory : P500,000
Purchases : P 250,000

Question : How much is the Ending Inventory ?

 0.25 = 20 % Gross Profit Rate on Sales
1 + 0.25

= 100% - 20% = 80 % Cost Ratio

P500,000 (sales ) X 80 % = P400,000 Cost of

Goods Sold
Beginning Inventory: P 500,000
Purchases: 250,000
Cost of Goods Available for Sale P750,000
Less: Cost of Goods Sold 400,000
Ending Inventory P 350,000