PAMANTASAN NG LUNGSOD NG VALENZUELA Case 1 Case 2 Case 3

INTERMEDIATE ACCOUNTING I Net Sales P 148,000

Special Lecture on Inventories Less: Cost of Goods Sold 198,400
Gross Profit 130,772
INVENTORY ESTIMATION Gross Profit Rate based on Cost 25% 22.5% 18.75%
Use of Estimate in Inventory Estimation
1. The inventory is destroyed by fire and other catastrophe, or theft of the merchandise has occurred Steps in Computing for estimated cost of ending inventory and inventory loss (e.g. caused by fire)
and the amount of inventory is required for insurance purposes. 1. Compute for the Net Sales (Sales less Sales Returns ONLY)
2. A physical count of the goods on hand is made and it is necessary to prove the correctness or 2. Determine the Gross Profit Rate (Either based on Sales or Cost)
reasonableness of such count by making an estimate. 3. Compute for the Estimated Cost of Goods Sold
3. Interim financial statements are prepared and a physical count of the goods on hand is not necessary GP based on Sales: Est.COGS = Net Sales x Cost Ratio (100% - GPRate)
either because it may take time to do the same or because only an estimate thereof is required to GP based on Cost: Est.COGS = Net Sales / Sales Ratio (100% + GPRate)
fairly present the financial position and financial performance of the entity. 4. Compute for the Estimated Cost of Goods Sold
Total Goods Available for Sale (Normal Computation) xx
Less: Estimated Cost of Goods Sold xx
Two Approaches in Estimating the Value of Inventory
1. Gross Profit Method Estimated Ending Inventory xx
2. Retail Inventory Method 5. Compute for the Inventory Loss
Estimated Ending Inventory xx
Less: Salvage or scrap value xx
Gross Profit Method
Based on the entity’s past experience, the average gross profit may be used to estimate the cost of goods In-transit goods owned by company xx
sold as well as the ending inventory to be reported in the interim financial statements. Inventory out on consignment xx
Other inventories owned by client but not in the
Gross profit method is useful method when: Warehouse during the fire xx
1. A periodic system is in use and inventories are required for interim statements. Inventory Loss xx
2. Inventories have been destroyed or lost by fire, or other casualty and the specific data required for
inventory valuation are not available.
3. The relationship between gross profit and sale remains stable over time.
However, the gross profit method would not be useful when:
1. There is a significant change in the mix of products being sold and the gross margin percentage
changes significantly during the year.
2. Estimating inventories to be reported in the annual financial statements.

Complete the table:

Case 1 Case 2 Case 3
Net Sales P 148,000
Less: Cost of Goods Sold 198,400
Gross Profit 130,772
Gross Profit Rate based on Sales 25% 22.5% 18.75%
Retail Inventory Method 4. Compute for the Ending Inventory at Cost
The retail method is simply a pragmatic way of determining cost by starting with the selling price and Ending Inventory at Cost = Ending Inventory at Retail x Cost Ratio
deducting a suitable estimate of the profit margin. The retail method is often used in the retail industry
for measuring inventories of large numbers of rapidly changing items with similar margins for which it 5. Compute for the Cost of Goods Sold
is impracticable to use other costing methods, for example, supermarkets, department stores and other Cost of Goods Sold = GAS at Cost – Ending Inventory at Cost
retail concerns where there is a wide variety of goods.
Since the inventories are recorded at retail price, the cost of inventory is determined by reducing the
Summary of Items to be added (deducted) in GAS at cost and at retail:
sales value of the inventory by the appropriate percentage gross margin. The percentage used takes into
Cost Retail
consideration inventory that has been marked down to below its original selling price. An average
Beginning Inventory xx xx
percentage for each retail department is often used.
Purchases xx xx
The ratio exploited using this method is not the gross profit but rather the cost ratio. Purchase Returns (xx) (xx)
Purchase Allowances (xx)
Methods in Computing the Cost Ratio Purchase Discounts (xx)
Method Beg. Inventory Mark-ups Mark-down Transportation-in xx
1. Conservative/ Mark-up xx
Include Include Exclude
Conventional/ LCNRV Mark-up Cancellation (xx)
2. Average Include Include Include Mark-down (xx)
3. First-in, First-out Exclude Include Include Mark-down Cancellation xx
Departmental transfer-in (debit) xx xx
Note: PAS 2,paragraph 22 requires either the average cost approach or the FIFO approach (but more Departmental transfer-out (credit) (xx) (xx)
particularly the average cost approach). The standard requires that the percentage to be used in the Abnormal losses (xx) (xx)
application of the retail method should be the percentage that has been marked down below its original GAS at Cost GAS at Retail
selling price, meaning net markdowns should be included in determination of the cost ratio.

Steps in computing Estimated Ending Inventory and Estimated Cost of Goods Sold
1. Compute for the cost ratio
𝐺𝐴𝑆 𝑎𝑡 𝑐𝑜𝑠𝑡
Cost Ratio =
𝐺𝐴𝑆 𝑎𝑡 𝑟𝑒𝑡𝑎𝑖𝑙

2. Compute for Net Sales

Sales xx
Less: Sales Return (xx)
Add: Normal Shortage xx
Employee Discount xx
Net Sales xx

3. Compute for the Ending Inventory at Retail

Ending Inventory at Retail = GAS at Retail – Net Sales