inventory estimation

• estimates are allowed under PAS 2 only if they approximate the cost
• under gross profit method, gross profit is assumed to be relatively constant from period to period
• only sales returns are deducted from gross sales when computing for net sales
• gross sales - sales return x cost ratio = COGS based on sales
• inventory loss on gross profit rate based on cost is the ending inventory
• net sales x cost ratio(100%/%) = COGs based on cost
• increase in inventory is the ending balance if inventory
• decrease in accounts payable is the beginning balance of AP
• beginning balance of wip + raw materials issued to production + direct labor + pverhead - COGM = ending balance of work in process
• beginning balance of raw materials + net purchases + freight in - raw materials issued to production = raw materials ending
• beginning balance of finished goods+ COGM - COGS = ending balance of finished goods
• retail method is used in retail industry for measuring quantities of inventories with rapidly changing items and with similar margins
• net markups are increase above the original retail price
• markup cancellation is the decrease in selling price that does not reduce the selling price 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
• cost ratio in average method= TGAS @ cost/TGAS @ retail
• then the cost ration under average method is multiplied with net sales to compute the COGS
• ending inventory @ cost = ending inventory at retail x cost ratio
• net purchases are computed as the sum of purchases + freight in - returns and discounts but only in the cost column
• departmental transfers are the transfer of goods between departments within an entity
• employee discounts are special discounts that are not recorded in the sales discounts account but treated as direct deductions from selling price
• sales - sales return + employee discounts + normal losses/spoilage = net sales under average method
• abnormal spoilage are deducted from bot cost and retail to compute the TGAS
• ending inventory @ retail x average cost ratio = ending inventory @ cost
• TGAS @ cost - ending inventory @ cost = COGS under average method
• net sales x average cost ratio = COGS
• under FIFO method, beginning inventories at cost and retail are excluded from TGAS
• when applying the retail method, separate computations should be made for departments that experience significantly higher or lower profit margins