Question

describe the information a company must have available in order to use the gross profit method for estimating ending inventory. Explain in detail

Answer 1

Gross profit method of inventory is used to calculate the value of inventory at the end of the period. Though we are required to have some information for the calculation of ending inventory using this method.

First of all we should have the Gross profit margin ratio. For example if any concern purchased goods for $ 8 and sells it for $ 10 , than gross profit margin will be $ 2. Gross profit margin ratio is used to calculate the cost of goods sold if value of sales is given. Taking above example as base if sales value is $ 10 and Gross profit ratio is 2% than cost of goods sold will be $ 10- $ 10*2%= $ 8

Now , further we require beginning value of inventory and total purchases during the period and sales during the period .

Continuing the above example, if inventory in the beginning is $ 100 and purchases made during the period is $ 500 , than cost of good available is $ 100+ $ 500=$ 600.

Now, sales during the period if $ 650 , than cost of good sold=650*80=$ 520

Estimated inventory at the end = $ 600-520= $ 80