Inventories PAS 2 (Set 2: Inventory Estimation)

2 methods used to estimate inventories

Answer explanation

1. Gross profit method

2. Retail inventory method

Gross Profit Method Procedural Approach

Answer explanation

1. Determine the trend

2. Identify gross profit rate

3. Determine cost ratio

4. Determine net sales

5. Determine cost of goods sold

6. Identify ending inventory

7. Identify inventory loss

Retail Inventory Method Procedural Approach

Answer explanation

1. Determine cost ratio

2. Determine net sales

3. Identify ending inventory at retail

4. Identify ending inventory at cost

5. Determine cost of goods sold

Gross Profit Method

Step 1: Analyze the trend or pattern

Answer explanation

Analyze the given, find out if there is a pattern regarding the gross profit rate.

If you found one, apply it to identify the gross profit rate

Gross Profit Method

Step 2: Determine gross profit rate

Answer explanation

To identify gross profit rate,

1. Know the trend

2. If average gross profit is stated to be used,

Compute GP%:

Gross profit rate yr 1 + yr 2 + yr n

÷

Total number of years

3. If overall gross profit is stated to be used,

Compute GP%:

Gross Profit yr 1 + yr 2 + yr n

÷

Sales yr 1 + yr 2 + yr n

Additional notes:

- if problem is silent, overall gross profit is used.

Gross Profit Method

Step 3: Determine the net sales

Answer explanation

Gross sales

Less: sales returns

Or sales return & allowances

Net sales

Additional notes:

Sales discount & sales allowance are ignored.

Gross Profit Method

Step 4: Determine cost ratio

Answer explanation

Sales

Less: Cost (Cost ratio)

Gross Profit

Gross Profit Method

Step 5: Determine Cost of Goods Sold

Answer explanation

Net sales

Multiply: Cost ratio

Cost of Goods Sold

Gross Profit Method

Step 6: Determine ending inventory

Answer explanation

MI, beg

Add: net purchases

Total goods available for sale

Less: Cost of goods sold

MI, end

Retail Inventory Method

Step 1: Determine cost ratio

Answer explanation

Use either:

1. Conservative / LCNRV / Conventional Method

2. FIFO method

3. Average method

Conservative Method : net markdown not included

FIFO method: beginning inventory not included

Average method: all included

Conservative :

Total goods available for sale at cost excluding markdown & markdown cancelation

÷

Total goods available for sale at retail excluding markdown & markdown cancelation

FIFO :

Total goods available for sale at cost excluding beginning inventory

÷

Total goods available for sale at retail excluding beginning inventory

Average :

Total goods available for sale at cost

÷

Total goods available for sale at retail