(Intermediate Accounting 1A)

LECTURE AID

2019

ZEUS VERNON B. MILLAN

Chapter 8 INVENTORY ESTIMATION
Related standard: PAS 2 Inventories

Learning Objectives
• Apply the methods of inventory
estimation.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
Inventory estimation

1. Gross profit method

a. GPR based on sales
b. GPR based on cost

2. Retail method
a. Average cost method
b. FIFO cost method

INTERMEDIATE ACCTG 1A (by:

MILLAN)
GROSS PROFIT METHOD

 Gross profit rate based on sales is computed by dividing

gross profit by the net sales.
 Gross profit rate based on cost is computed by dividing
gross profit by the cost of goods sold.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
• GPR is 25% based on cost GPR based on sales?
• Net Sales 125% Gross Profit / Net Sales
• Cost of Sales 100% 25% / 125%
• Gross Profit 25% 20%

INTERMEDIATE ACCTG 1A (by:

MILLAN)
• GPR based on cost? GPR is 20% based on sales
• Net Sales 100%
• Cost of Sales 80%
• Gross Profit 20%
Gross profit/ COS
• 20%/80% = 25%

INTERMEDIATE ACCTG 1A (by:

MILLAN)
COST RATIO

• GPR based on sales

Example: GPR based on sales is 25%.

Cost ratio = (100% - 25%) = 75%

• GPR based on cost

Example: GPR based on cost is 25%.

Cost ratio = (100% ÷ 125%) = 80%

• COS OF SALES / NET SALES

INTERMEDIATE ACCTG 1A (by:

MILLAN)
RETAIL METHOD

• The cost ratio is computed directly without regard to

the gross profit rate, unlike in gross profit method.
• Net mark-ups and net mark-downs are considered.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
DEFINITION OF TERMS
• Net markups (markups less markup cancellations) are net increases above the
original retail price, which are generally caused by changes in supply and demand.
• Markup refers to increase above the original retail price.
• Original retail price refers to the selling price at which the goods are first offered
for sale.
• Markup cancellation refers to decrease in selling price that does not reduce the
selling price below the original retail price.  
• Net markdowns (markdowns less markdown cancellations) are net decreases
below the original retail price.
• Mark-down refers to the decrease below the original retail price.
• Markdown cancellation refers to increase in selling price that does not raise the
selling price above the original retail price.

INTERMEDIATE ACCTG 1A (by:

MILLAN)
APPLICATIONS OF THE RETAIL METHOD
1. Average cost method

2. FIFO cost method

INTERMEDIATE ACCTG 1A (by:

MILLAN)
 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1A (by: MILLAN)

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 1A (by: MILLAN)

 END
INTERMEDIATE ACCTG 1A (by: MILLAN)