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The Gross Profit Method for Estimated Ending Inventory

Most companies would like to prepare interim financial statements such as monthly,quarterly or semiannually. Physical count inventory is made at the end of year. For thisreason the companies use some methods to calculate its ending inventory, one of thesemethods called "The Gross Profit Method".

The Gross Profit Method sometimes called "the Gross Margin Method"! means "away to estimate the value of ending inventory on the ase of percentage of gross profit"#therefore, companies must determine the percentage of gross profit at the end of year after

preparing the financial statements.The percentage of gross profit is calculated as follows$

%hether as a percentage of sales or net sales$The gross profit percentage & gross profit 'sales(r, a percentage of cost of goods sold or cost of sales$The gross profit percentage & gross profit ' cost of goods sold

To computethe ending inventory y the Gross Profit Method, there are five steps$). To determine the gross profit rate whether as a percentage of sales or a percentageof cost cost of goods sold ! , if the percentage was of cost , you must convert this

percentage to a percentage of sales ecause the cost of goods sold is variale ,convert the percentage from cost to sales as follows $Gross profit on sales &percentage markup on cost ' )**+ percentage markup oncost!.For e-ample if the + was /+ of cost, to convert this percentage from cost to salesas follows$Gross Profit on sales &*./' )*./! 0)**&*+.

Note$ The computed gross profit of sales must equal the computed gross profit ofcost. To illustrate this prolem assume the following information that related to 123ompany$45eginning 6nventory 7*,***# Purchases 7)8*,***# 9ales 7):*,*** and Gross Profit

percentage /+ of cost.Solution$4

Gross Profit on sales &*./' )*./! 0)**&20%.Gross Profit &7):*,*** ;*+ & $38,0003ost of goods sold &7):*,***4et Purchases Fright in # >et Purchases &Purchases ?@iscount , Aeturns B Cllowances Purchases!

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. This method provides Iust an estimate. This procedure doesnJt normally acceptalefor e-ternal financial reporting purposes.

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inventory 01an. (, 2) "as (),; in the past Carr*s #ross profit hasavera#ed ! of sellin# price.

Instructions3ompute the estimated cost of inventory urned, and give entries as of @ecemer