© 2014 Cengage Learning. All Rights Reserved. Learning Objective LO5 Estimate the cost of merchandise inventory using the gross profit method of estimating inventory. © 2014 Cengage Learning. All Rights Reserved.

Gross Profit Method of Estimating Inventory Lesson 20-3 Gross Profit Method of Estimating Inventory LO5 Estimating inventory by using the previous year’s percentage of gross profit on operations is called the gross profit method of estimating inventory.

Gross Profit Method of Estimating Inventory Lesson 20-3 Gross Profit Method of Estimating Inventory LO5 STEP 1: Beginning inventory, January 1 $331,235.20 Plus net purchases for January 1 to January 31 +64,516.21 Equals cost of merchandise available for sale $395,751.41 STEP 2: Net sales for January 1 to January 31 $122,367.00 Times previous year’s gross profit percentage × 40.00% Equals estimated gross profit on operations $48,946.80 STEP 3: Net sales for January 1 to January 31 $122,367.00 Less estimated gross profit on operations −48,946.80 Equals estimated cost of merchandise sold $73,420.20 STEP 4: Cost of merchandise available for sale $395,751.41 Less estimated cost of merchandise sold −73,420.20 Equals estimated ending merchandise inventory $322,331.21

Estimating Inventory for Other Months Lesson 20-3 Estimating Inventory for Other Months LO5 When the gross profit method of estimating inventory is used for months other than the first month of the fiscal period, the process is the same as that just illustrated.

Lesson 20-3 Audit Your Understanding 1. When neither a perpetual system is maintained nor a physical inventory is taken, how can an ending merchandise inventory be determined that is accurate enough for a monthly income statement? ANSWER By using the gross profit method of estimating inventory

Lesson 20-3 Audit Your Understanding 2. What amounts are needed to estimate ending merchandise inventory? ANSWER Actual net sales and net purchases amounts The beginning inventory amount The gross profit percentage

Lesson 20-3 Audit Your Understanding 3. What amount is used for beginning inventory for a month that is not the first month of a fiscal year? ANSWER The beginning inventory for the month is the same as the ending inventory from the previous month.