# Chapter 22 Section 3

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```					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
Evans Company
Income Statement
For Month Ended June 30, 2007

% of Net
Sales

Operating Revenue:

Net Sales                                                245 0 0 0   00   100.0
Cost of Merchandise Sold:

Estimated Beginning Inventory, Jun 1      154 8 0 0 00

Net Purchases                             47 9 0 0 00

Merchandise Available for Sale            202 7 0 0 00

Less Estimated Ending Inventory, Jun 30   67 9 5 0 00
Cost of Merchandise Sold                                 134 7 5 0 00     55.0

Gross Profit on Operations                                  110 2 5   0 00   45.0

Operating Expenses                                           76 9 3 0 00     31.4

Net Income                                                   33 3 2 0 00     13.6
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.

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