inventory estimation

• there may be instances where the value of inventories must be estimated, such as when it is not practicable to take a physical count.
• estimates are allowed under PAS 2 only if they

  approximate the cost
• inventory estimation is made only for interim reporting.
• for annual reporting, physical count of inventories is more appropriate.
• cost of inventories may be estimated using

  gross profit method or retail method
• assumed to be relatively constant from period to period

  gross profit method
• used to determine the cost ratio

  gross profit ratio
• used to estimate the inventory and COGS

  cost ratio
• GPR can be expressed as a percentage:

  based on sales or based on cost of goods sold
• dividing gross profit by the net sales

  GPR based on sales
• dividing gross profit by the COGS

  GPR based on cost
• cost ratio from GPR based on sales = 100% net sales - GPR based on sales
• cost ratio from GPR based on cost = 100% COGS / net sales (100%+ GPR based on cost)
• for purposes of inventory estimation, only sales returns are deducted from gross sales when computing for net sales.
• sales discounts and allowances are not deducted because these do not affect the physical inventory of goods.
• sales returns affect the physical inventory of goods because goods are physically returned to the seller.
• often used in the retail industry for measuring large quantities of inventories with rapidly changing items and with similar margins and for which it is impracticable to use other costing methods.

  retail method
• under the retail method, the cost ratio is directly without regard to the GPR
• Under the retail method, net mark-ups and net mark-downs are considered.
• mark up less markup cancellations

  net markups
• net increases above the original retail price, caused by changes in supply and demand

  net markups
• refers to the selling price at which the goods are first offered for sale

  original retail price
• refers to increase above the original retail price

  markup
• refers to a decrease in selling price that does not reduce the selling price below the original retail price

  markup cancellation
• markdowns less markdown cancellation

  net markdowns
• net decreases below the original retail price

  net markdowns
• refers to the decrease below the original retail price

  markdown
• refers to an increase in selling price that does not raise the selling price above the original retail price

  markdown cancellation
• retail method is applied using:

  average cost method or FIFO cost method
• when determining the TGAS, net markups are added while net markdowns are deducted.
• PAS 2 requires that the cost ratio to be used in estimating inventory under the retail method should be marked down below its original reail price.
• refer to transfers of goods between departments within an entity.

  Department transfers
• refers to inventory received by a department from another department. It is added to purchases at cost and retail

  departmental transfers-in or debit
• refers to inventory transferred out by a department to another department. It is deducted from purchases at cost and retail.

  departmental transfers-out or credit
• are special discounts that are not recorded in the sales discounts account but rather treated as direct deductions from the selling price.


  employee discounts
• Employee discounts are added back to sales because these discounts decrease sales but do not affect physical inventory.
• should be ignored or not deducted from gross sales

  sales discounts
• generally allowed in an entity's pricing policies. it is deducted from the retail column after calculation of the cost ratio.


  normal spoilage
• charged to COGS, thus, it is added to sales when computing for net sales. It usually arises from shrinkage or breakage

  normal spoilage
• should be deducted from both the cost and retail columns before the calculation of the cost ratio, as could distort the ratio.


  abnormal spoilage