Estimates of Inventory Sometimes taking actual inventory counts

Estimates of Inventory Gross Profit Method Need the following information: • Profit markup •

Estimates of Inventory Gross Profit Method We know Cost of Goods Available for Sale

Estimates of Inventory Gross Profit Method Beg Inv (at cost) Purchases (at cost) Goods

Estimates of Inventory Retail Method Need to know: • Beginning Inventory at cost and

Estimates of Inventory Retail Method Beg. Inv Purchases Available for Sale Cost Retail $50,

Estimates of Inventory Retail Method with Markdowns Beg. Inv Purchases Available for Sale Markdown

Slides: 8

Download presentation

Estimates of Inventory Sometimes taking actual inventory counts is impractical • e. g. for auditors who want to verify inventory balances So, it may be easier to “back-into” estimates of inventory balances 2 common methods used: • Gross Profit Method • Retail Inventory Method

Estimates of Inventory Gross Profit Method Need the following information: • Profit markup • Beginning Inventory • Purchases • Sales

Estimates of Inventory Gross Profit Method We know Cost of Goods Available for Sale since we know Beginning Inventory and Purchases We estimate Cost of Goods Sold = Sales – Markup We then estimate Ending Inventory = Co. G Available - Co. GS

Estimates of Inventory Gross Profit Method Beg Inv (at cost) Purchases (at cost) Goods Available $40, 000 $100, 000 $140, 000 Sales Markup $120, 000 30% of Cost of Goods Sold: Cost + 30% Cost = $120, 000 1. 30 Cost = $120, 000 Cost = 120, 000 / 1. 3 = $92, 308 Set sales to equal Cost + Markup Then, solve for Cost

Estimates of Inventory Gross Profit Method Beg Inv (at cost) Purchases (at cost) Goods Available $40, 000 $100, 000 $140, 000 COGS (estimated) End Inv (estimated) $92, 308 $47, 692

Estimates of Inventory Retail Method Need to know: • Beginning Inventory at cost and retail values • Purchases at cost and retail values • Sales at retail value

Estimates of Inventory Retail Method Beg. Inv Purchases Available for Sale Cost Retail $50, 000 $30, 000 $80, 000 $75, 000 $45, 000 $120, 000 Goods Sold $90, 000 Ending Inventory $30, 000 Cost-to-retail ratio = 80, 000 / 120, 000 = 67% Ending Inventory at cost = 67% x $30, 000 = $20, 000

Estimates of Inventory Retail Method with Markdowns Beg. Inv Purchases Available for Sale Markdown Goods Sold Ending Inventory Cost Retail $50, 000 $30, 000 $80, 000 $75, 000 $45, 000 $120, 000 $24, 000 $96, 000 $72, 000 $24, 000 20% x $120, 000 Cost-to-retail ratio = 80, 000 / 96, 000 = 83. 34% Ending Inventory at cost = 83. 34% x $24, 000 = $20, 000 Now, assume markdown of 20% off retail price