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Estimates of Inventory

Estimates of Inventory. Sometimes taking actual inventory counts is impractical e.g. for auditors who want to verify inventory balances So, it may be easier to “back-into” estimates of inventory balances 2 common methods used: Gross Profit Method Retail Inventory Method.

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Estimates of Inventory

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  1. Estimates of Inventory • Sometimes taking actual inventory counts is impractical • e.g. for auditors who want to verify inventory balances • So, it may be easier to “back-into” estimates of inventory balances • 2 common methods used: • Gross Profit Method • Retail Inventory Method

  2. Estimates of Inventory Gross Profit Method • Need the following information: • Profit markup • Beginning Inventory • Purchases • Sales

  3. Estimates of Inventory Gross Profit Method We know Cost of Goods Available for Sale since we know Beginning Inventory and Purchases We estimate Cost of Goods Sold = Sales – Markup We then estimate Ending Inventory = CoG Available - CoGS

  4. Then, solve for Cost Set sales to equal Cost + Markup Estimates of Inventory Gross Profit Method Beg Inv (at cost) $40,000 Purchases (at cost) $100,000 Goods Available $140,000 Sales $120,000 Markup 30% of Cost Cost of Goods Sold: Cost + 30% Cost = $120,000 1.30 Cost = $120,000 Cost = 120,000 / 1.3 = $92,308

  5. Estimates of Inventory Gross Profit Method Beg Inv (at cost) $40,000 Purchases (at cost) $100,000 Goods Available $140,000 COGS (estimated) $92,308 End Inv (estimated) $47,692

  6. Estimates of Inventory Retail Method • Need to know: • Beginning Inventory at cost and retail values • Purchases at cost and retail values • Sales at retail value

  7. CostRetail Beg. Inv $50,000 $75,000 Purchases $30,000$45,000 Available for Sale $80,000 $120,000 Cost-to-retail ratio = 80,000 / 120,000 = 67% Estimates of Inventory Retail Method Goods Sold $90,000 Ending Inventory $30,000 Ending Inventory at cost = 67% x $30,000 = $20,000

  8. CostRetail Beg. Inv $50,000 $75,000 Purchases $30,000$45,000 Available for Sale $80,000 $120,000 20% x $120,000 Cost-to-retail ratio = 80,000 / 96,000 = 83.34% Estimates of Inventory Retail Method with Markdowns Markdown $24,000 $96,000 Goods Sold $72,000 Ending Inventory $24,000 Ending Inventory at cost = 83.34% x $24,000 = $20,000 Now, assume markdown of 20% off retail price

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