1. Estimates of Inventory Sometimes taking actual inventory counts is impractical e.g. for auditors who want to verify inventory balances So, it may be easier to “back-into” estimates of inventory balances 2 common methods used: Gross Profit Method Retail Inventory Method

2. Estimates of Inventory Gross Profit Method Need the following information: Profit markup Beginning Inventory Purchases Sales

3. Estimates of Inventory Gross Profit Method We know Cost of Goods Available for Sale since we know Beginning Inventory and Purchases We estimate Cost of Goods Sold = Sales – Markup We then estimate Ending Inventory = CoG Available - CoGS

4. Estimates of Inventory Gross Profit Method Beg Inv (at cost)$40,000 Purchases (at cost)$100,000 Goods Available$140,000 Sales$120,000 Markup30% of Cost Cost of Goods Sold: Cost + 30% Cost = $120,000 Set sales to equal Cost + Markup 1.30 Cost = $120,000 Cost = 120,000 / 1.3 = $92,308 Then, solve for Cost

5. Estimates of Inventory Gross Profit Method Beg Inv (at cost)$40,000 Purchases (at cost)$100,000 Goods Available$140,000 COGS (estimated)$92,308 End Inv (estimated)$47,692

6. Estimates of Inventory Retail Method Need to know: Beginning Inventory at cost and retail values Purchases at cost and retail values Sales at retail value

7. Estimates of Inventory Retail MethodBeg. Inv$50,000$75,000 Purchases$30,000$45,000 Available for Sale$80,000$120,000 CostRetail Goods Sold$90,000 Ending Inventory$30,000 Cost-to-retail ratio = 80,000 / 120,000 = 67% Ending Inventory at cost = 67% x $30,000 = $20,000

8. Estimates of Inventory Retail Method with MarkdownsBeg. Inv$50,000$75,000 Purchases$30,000$45,000 Available for Sale$80,000$120,000 CostRetail Goods Sold$72,000 Ending Inventory$24,000 Now, assume markdown of 20% off retail price Markdown$24,000 20% x $120,000 $96,000 Cost-to-retail ratio = 80,000 / 96,000 = 83.34% Ending Inventory at cost = 83.34% x $24,000 = $20,000