In short
The gross profit method estimates ending inventory by subtracting estimated cost of goods sold (sales × (1 − gross profit percentage)) from the cost of goods available for sale.
Key takeaways
- It is used for interim estimates and to estimate inventory lost in a fire or theft.
- It isn't acceptable for annual financial statements.
- Its accuracy depends on the gross profit percentage being stable.
Example
Goods available $500,000, sales $600,000, gross profit 30%: estimated cost of goods sold is $420,000, so ending inventory is about $80,000.
Where it's tested
FAR: Inventory — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Beginning inventory was $60,000 and purchases were $240,000. Sales were $250,000, and the historical gross margin is 30% of sales. Using the gross profit method, what is estimated ending inventory?