Unit 2 Chapter 6: INVENTORY COSTING Unit 2 Test (covering chapter 5 and 6) will occur on Oct 27 (Monday)Unit 2 Test (covering chapter 5 and 6) will occur.

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Presentation transcript:

Unit 2 Chapter 6: INVENTORY COSTING Unit 2 Test (covering chapter 5 and 6) will occur on Oct 27 (Monday)Unit 2 Test (covering chapter 5 and 6) will occur on Oct 27 (Monday) Friday (Oct 24) will be 30 minutes class because of community clean up. So we will spend that time for Q&A / study period on Friday.

Estimating Inventories As we learned in this chapter, a company which uses period inventory system, must do a physical count to find out how much inventory they have on hand. Sometimes it is impractical or impossible to do a physical count; as a result, you will have to estimate inventory at times.

Estimating Inventories There are two most common reasons for needing to estimate inventories. – First management may want monthly or quarterly financial statements but does not have the time for doing a physical inventory – Second, a casualty such as fire or flood may make it impossible to take a physical inventory. There are two methods of estimating inventories: – Gross Profit Method – Retail Inventory Method

Gross Profit Method The Gross Profit Method estimates the cost of ending inventory by applying the gross profit margin to net sales It is commonly used to prepare interim (e.g. monthly) financial statements in a periodic inventory system. This method is relatively simple but effective.

Gross Profit Method The formula: Step 1: ECOGS = Net Sales – EGP ECOGS = Estimated Cost of Goods sold EGP = Estimated Gross Profit = Net Sales * Gross Profit margin (such as 30% or 40%) Step 2: EEI = BI + P – ECOGS EEI = Estimated Ending Inventory BI = Begining Inventory P = Purchases BI + P = CGAS = Cost of Goods Available for Sale

Gross Profit Method The Gross Profit Method is based on assumption that the gross profit margin will remain constant from one year to the next. However, the gross profit margin may not remain constant because of a change in merchandising policies or in market conditions. In such cases, the margin should be adjusted to reflect the current situation. This method can not be used for year end financial statements. (physical count must be done at least once a year) Accountants and managers often use this method to confirm the accuracy of the ending inventory count.

Unit 2 : Chapter 6 Inventory Costing Unit 2 : Chapter 6 Inventory Costing Unit 2 Test will occur on Thursday April 10. Midterm report card is due Monday April 14.

Classwork / Homework P323 E6.14 P328 P6.11 A similar question will show up on the Unit 2 test.