Inventories Part II
Inventory Estimation
In many cases, it is necessary to know the approximate value of inventory when it is not possible to take
physical count.
The approximation or estimation of inventory is made for varied reasons. The most common reasons for
making an estimate of the cost of the goods on hand are:
a.) The inventory is destroyed by fire and other catastrophe, or theft of the merchandise has
occurred and the amount of inventory is requires for insurance purposes.
b.) A physical count of the goods on hand is made and it is necessary to prove the correctness or
reasonableness of such count by making an estimate.
c.) Interim financial statements are prepared and a physical count of the goods on hand is not
necessary because it may take time to the same.
There are two widely accepted procedures fro approximating the value of inventory, namely the gross
profit method and the retail inventory method
Gross Profit Method
This method is based on the major assumption that the rate of gross profit remains approximately the
same from period to period and therefore the ratio of cost of good sold to net sales is relatively constant
period to period.
Solution Guide:
Cost of goods available for sale XX
Less: Ending Inventory( Squeeze) XX
Cost of good Sold XX
NOTES:
(1) Cost of Good Sold is computed as
(If Gross Profit is based on sales) Net Sales X Cost Ratio
( If Gross Profit is based on Cost) Net Sales /Sales Ratio
(2) To arrive at net sales, sales returns are the only item to be deducted for inventory estimation
purposes only.
(3) Gross profit method may be used to estimate inventories for Interim Reporting purposes but
not acceptable for annual reporting.
Inventories Part II
Let us try!
1. The following data are gathered for the current year:
Inventory, Beginning 600,000
Purchases 2,530,000
Purchase Return 15,000
Purchase Allowance 5,000
Purchase Discount 10,000
Freight In 50,000
Sales 3,100,000
Sales Return 100,000
Sales Allowance 50,000
Sales Discount 150,000
1. How much is ending inventory if under the gross profit rate of 25% on sales
2. How much is ending inventory if under the gross profit rate of 25% on cost
2. At year end, Pamela Company reported that a flood caused severe damage to the entire
inventory. Based on recent history, the entity had a gross profit of 25% of sales.
The entity provided the following information for the current year:
Inventory January 01 500,000
Purchases 4,000,000
Purchase returns 200,000
Sales 5,600,000
Sales Returns 400,000
Sales Allowances 100,000
1. What is the Cost of Good Sold
a. 4,160,000 b. 4,080,000 c. 3,900,000 d. 3,825,000
2. What is the cost of ending inventory damaged by flood?
a.475,000 b.400,000 c. 260,000 d.220,000
3. On September 30, Brock Company reported that a fire caused severe damage to the entire
inventory. The entity had a gross profit of 30% on cost.
The entity provided the following data for nine months ended September 30:
Inventory at January 01 1,100,000
Net Purchases 6,000,000
Net Sales 7,280,000
A physical inventory disclosed usable damaged goods which can be sold for P100,000.
1. What is estimated cost of good sold for the nine months ended September 30?
a. 5.5 M b. 4.970 M c. 5.096 M d. 5.6M
2. What is the estimated amount of fire loss?
a. 1.5 M b. 1.4 M c. 2.004 M d.1.964M
