Name
Date
Period
3.02 Inventory Formulas and Definitions
To compute Gross Profit:
Gross
Profit
=
Sales
Cost of
Goods
Sold
-
To compute Cost of Goods Sold:
Cost of
Goods
Sold
=
Beginning
Inventory
+
Net
Purchases
-
Ending
Inventory
Beginning Inventory and Net Purchases can be found on the financial statements.
Ending Inventory, however, often needs to be calculated. Once Ending Inventory has
been calculated, it can be substituted into the formula above to calculate Gross Profit.
1. Periodic Inventory
a. Also called a Physical Inventory
b. Determined by counting, weighing, or measuring items of merchandise
on hand
c. For companies with large inventories, taking a physical inventory is very
costly.
2. Perpetual Inventory
a. Determined by keeping a continuous record of increases, decreases,
and balance on hand.
b. A physical, periodic inventory is often conducted once a year to verify
the accuracy of perpetual inventory records.
Name
Date
Period
3.02 Steps to Calculate Ending Inventory Using the Gross
Profit Method
This method uses the percentage of gross profit to estimate the cost of the ending
inventory for interim financial statements, or in situations where an ending inventory
cannot be obtained (usually because of fire or theft).
Gross Profit Method of Valuing Inventory
Beginning Inventory, Jan 1
1
Plus: Net Purchases to Date
2
Equals: Merchandise Available for Sale
Net Sales to Date
3
4
1
$
+
$
$
Less: Estimated Gross Profit
(Net Sales x Estimated Gross Profit ____)
Less: Estimated Cost of Merchandise Sold
(Net Sales to Date Less Estimated Gross Profit)
Equals: Estimated Ending Inventory
5
6
7
$
To Calculate Ending Inventory under the GP Method:
1. List _________________________________________.
2. Determine ____________________________________.
3. Calculate _____________________________________.
4. Determine ____________________________________.
5. Calculate _____________________________________.
6. Calculate _________________________________________________________.
7. Calculate _____________________________________.