Estimating Inventories

• It is necessary when physical count is deemed impossible due to some circumstances and immediate inventory data is needed

  Inventory estimation method
• What are the two methods being used for estimating inventories?

  1. Gross Profit Method
  2. Retail Method
• Purpose for inventory valuation estimates

  1. For interim financial reporting
  2. Inventory reasonableness
  3. Other extraordinary circumstances
• What do you call to a type of inventory estimation that allows the use of gross profit percentage based on either COGS or net sales to estimates value?

  Gross Profit Method
• GPR based on sales

  1. base amount (denominator) is net sales
  2. net sales is assumed to be one hundred
• Formulas of computing Cost of Sales - based on sales

  1. GPR = GP/ NET SALES
  2. Cost Ratio = 1 - GPR
  3. COGS = Net Sales * Cost Ratio
• Formula of COGS if based on cost

  1. GPR = GP/ NET SALES
  2. Cost of Sales = Net Sales/ (1 + GPR)
• Gross profit is computed,

  If gross profit is based on sales : Net sales x GPR on sales

  If gross profit is based on cost: Net sales ÷ (Sales ratio/GPR)
• Compute for the amount of inventory that should be on hand:

  Inventory, beg. xxx

  Add: Purchases xxx

  Cost of goods available for sale xxx

  Less: Estimated cost of good sold (from step 1) (xxx)

  Inventory that should be on hand

  xxx
• Excluded in computation of net sales; sales allowances and discounts
• Determine if there is an inventory shortage or overage by comparing the actual inventory vs estimated inventory

  Estimated ending inventory xx

  Less: Inventory based on count (xx)

  Inventory Shortage xx
• Loss on Casualty

  Estimated ending inventory xx

  Less: Undamaged goods @ cost

  (goods in transit, out on consignment) (xx)

  Damaged goods @ LCNRV (xx)

  Total inventory loss xx
• What inventory estimation applies information for retail, which is the selling price, to determine its relationship with costs, specifically the cost ratio and also the estimated ending inventory?

  Retail Inventory Method
• Accounting procedures in Retail Method

  1. Compute for TGAS at cost and retail
  2. Compute for the amount of COGS at retail
  3. Compute for the amount of estimated ending inventory at retail
  4. Compute for the estimated cost of the ending inventory
• Compute for GAS at cost and retail

  
• Compute for the amount of cost of goods sold at retail:

  Sales     xxx

  Sales returns             (xxx)

  Sales allowances -

  Sales discounts       -

  Employee discounts     xxx

  Normal loss                   xxx

  Cost of goods sold at retail   xxx
• Compute for the amount of estimated ending inventory at retail:

  Goods available for sale at retail xxx

  Less: Cost of goods sold at retail xxx

  Estimated ending inventory at retail xxx
• Compute for the estimated cost of the ending inventory:

  Estimated ending inventory at retail xxx

  Multiply by cost to retail ratio % 

  -----

  Estimated cost of ending inventory xxx
• What are the three method in computing cost to retail ratio?

  1. Conservative, Conventional, LCNRV approach
  2. Average Method
  3. FIFO method
• Formula of cost to retail ratio

  GAS at cost/GAS at retail = cost to retail ratio
• Characteristics of FIFO

  1. excluded beginning inventory
• Characteristics of Conservative

  1. Consider all but not mark downs
• Characteristic of average

  1. consider both price mark up and mark down