Accounting 3 Chapter 22 Section 3

Estimating Inventory- Gross Profit Method Gross Profit Method -Estimating inventory by using the previous year’s percentage of gross profit on operations. This is most often used on monthly financial statements. This is less costly than calculating inventory costs with a periodic or perpetual inventory system.

Gross Profit Inventory Estimation Four values are needed to use the four step calculation process:  Actual Net Sales (found in general ledger)  Net Purchases (also found in general ledger)  Beginning Inventory Amount (found on prior period’s financial statements)  Gross Profit Percentage (estimated by management based on previous year’s actual percentage)

Four Step Calculation Process (These numbers will generally be given to you or you have instructions on where to find them) Step 1  Beginning Inventory, January 1  Plus net purchases for January 1 to January 31  Equals cost of merchandise available for sale Step 2  Net Sales for January 1 to January 31  Times previous year’s gross profit percentage  Equals estimated gross profit on operations Step 3  Net sales for January 1 to January 31  Less estimated gross profit on operations  Equals estimated cost of merchandise sold Step 4  Cost of merchandise available for sale  Less estimated cost of merchandise sold  Equals estimated ending merchandise inventory

Example: Estimated Beg. Inv. : $238,750 Actual Net Purchase for January: $125,450 Actual Net Sales for January: $206,250 Estimated Gross Profit Percentage: 48% Actual Operating Expenses for June: $79,200 Beg. Inv. $238,750 Plus Net Purchases + 125,450 Equals CMAS 364,200 Net Sales $206,250 Times GP% X 48% Equals EGPO 99,000 Net Sales $206,250 Less EGPO - 99,000 Equals ECMS 107,250 CMAS $364,200 Less ECMS - 107,250 Equals Estimated Ending 256,950 Merchandise Inventory

Gross Profit Inventory Estimation If you are figuring Gross Profit Inventory Estimation for any month other than the first month of the fiscal period, the process is the same. The only exception is you use the data from the month you want to calculate and the month immediately prior to retrieve your information.

Filling in the Income Statement On the Income Statement, the only other information you will need that you do not already have is the Estimated Ending Inventory. When you finish calculating your figures, do not forget to also calculate the percentage of sales column. (Everything is divided by Sales)

Work Together p. 585 Income Statement on next slide, Assignment on last slide. Beg. Inv. $154,800 Plus Net Purchases + 47,900 Equals CMAS 202,700 Net Sales $245,000 Times GP% X 45% Equals EGPO 110,250 Net Sales $245,000 Less EGPO - 110,250 Equals ECMS 134,750 CMAS $202,700 Less ECMS - 134,750 Equals Estimated Ending 67,950 Merchandise Inventory

Income Statement % of Net Sales Evans Company For Month Ended June 30, 2007 Operating Revenue: Net Sales Cost of Merchandise Sold: Estimated Beginning Inventory, Jun Merchandise Available for Sale Less Estimated Ending Inventory, Jun Cost of Merchandise Sold Net Purchases Gross Profit on Operations Operating Expenses Net Income

Assignment Do Application 22-3 and Mastery Problem by hand. (I do not have all of the information for you to complete this chapter on the computer. It is different from what is in the book.) Turn it into Mrs. Middleton. Move on to Chapter 23.