INVENTORY ESTIMATION: GROSS PROFIT AND

RETAIL INVENTORY METHOD

1. Use of Estimate in Inventory Valuation

- When it is NOT POSSIBLE TO TAKE A
PHYSICAL COUNT

2. Basic FORMULA OF GROSS PROFIT - SALES ALLOWANCE & SALES DISCOUNT

METHOD are IGNORED, NOT DEDUCTED FROM
- GAS SALES.
LESS: COGS - Because these items DECREASES THE
= ENDING INVENTORY AMOUNT OF SALES (they DON’T
AFFECT THE PHYSICAL VOLUME OF
3. “NORMAL” COMPUTATION OF COGS GOODS SOLD)
GAS - This would OVERSTATE THE
LESS: COGS INVENTORY
= ENDING INVENTORY - UNDERSTATE THE COGS
4. Why is the method called GROSS - OVERSTATE THE GROSS INCOME
PROFIT METHOD? 8. Use of RETAIL INVENTORY METHOD
- COGS is computed through the use of - KEEPING TRACK OF UNIT COST AT ALL
gross profit rate. TIMES IS DIFFICULT
- Came to its name because SELLING
PRICE / RETAIL PRICE is tagged to each
item.
- The term RETAIL means SELLING PRICE
-

5. Gross Profit on COST TO SALES

 ON COST is 20%
NET SALES 125%
COGS 100%
GROSS PROFIT ON COST 25%
GROSS PROFIT ON SALES (25/125)
= 20%
6. Gross Profit on SALES TO COST
 ON SALES is 20%
NET SALES 100%
COGS 80%
GROSS PROFIT ON SALES 20%
GROSS PROFIT ON COST (20/80)
= 25%
7. SALES ALLOWANCE & SALES DISCOUNT
TREATMENT IN RELATION TO GROSS
PROFIT METHOD