Scribd
Upload
236 views

Module 3 - Topic 4 (Gross Profit Method)

This document provides an instructional module for an intermediate accounting course. It discusses the gross profit method for valuing inventory. The gross profit method uses the historical gross profit rate to estimate the cost of ending inventory. It involves calculating the cost of goods available for sale, estimated gross profit based on the historical rate, and then estimated cost of goods sold to leave the estimated cost of ending inventory. An example is provided to demonstrate how to use the gross profit method to estimate ending inventory cost.

Uploaded by

Ann Bergonio
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
236 views

Module 3 - Topic 4 (Gross Profit Method)

This document provides an instructional module for an intermediate accounting course. It discusses the gross profit method for valuing inventory. The gross profit method uses the historical gross profit rate to estimate the cost of ending inventory. It involves calculating the cost of goods available for sale, estimated gross profit based on the historical rate, and then estimated cost of goods sold to leave the estimated cost of ending inventory. An example is provided to demonstrate how to use the gross profit method to estimate ending inventory cost.

Uploaded by

Ann Bergonio
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Prepared by: Ms. HAZEL JADE E.

VILLAMAR
E-mail Address: [email protected]________

Central Luzon State University


Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course


ACCTG 2105 / Intermediate Accounting 1

Module 3
Topic 4 (GROSS PROFIT METHOD)
Overview

This course covers the detailed discussion, appreciation, and


application of the Philippine Financial Reporting Standards (PFRS) on the
assets, financial and non-financial of a business enterprise. Emphasis is
given on the interpretation and application of the accounting standards on
Financial Assets and their required disclosures. The related internal control,
ethical issues and management of assets are also covered. Exposure to
computerized system in receivables, inventory and lapsing schedules is a
requirement.

I. Objectives

At the end of the module, the following are expected:


A. Understand the meaning of inventories.
B. Identify the major classes of inventory.
C. Account for inventory transactions using periodic and perpetual inventory system.
D. Apply the FIFO, weighted average, moving average cost formula and specific
identification methods.
E. Explain the lower of cost and net realizable value basis of measurement.
F. Account for inventory method using direct and allowance method.
II. Learning Activities
GROSS PROFIT METHOD

Valuing Inventory

An inventory valuation allows a company to provide a monetary value for items


that make up their inventory. Inventories are usually the largest current asset of a
business, and proper measurement of them is necessary to assure accurate financial
statements. If inventory is not properly measured, expenses and revenues cannot be
properly matched and a company could make poor business decisions.
A company will choose an inventory accounting system, either perpetual or
periodic. In perpetual inventory the accounting records must show the amount of
inventory on hand at all times. Periodic inventory is not updated on a regular basis.

Definition of Gross Profit Method

The gross profit method is a technique for estimating the amount of ending
inventory. The gross profit method might be used to estimate each month's ending
inventory or it might be used as part of a calculation to determine the approximate
amount of inventory that has been lost due to theft, fire, or other reasons.
The gross profit method assumes that a company’s gross profit rate in the current
period is similar to that of the previous periods. It estimates the cost of ending inventory
by using the relationship between cost of goods available for sale, cost of goods sold,
and ending inventory in the cost of goods sold model.
The gross profit method includes the following steps:

Step 1. Calculate the historical gross profit rate, as shown below:

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝑝𝑟𝑖𝑜𝑟 𝑃𝑒𝑟𝑖𝑜𝑑𝑠


Historical Gross Profit Rate=
Net sales from prior Periods

Step 2. Calculate the cost of goods available for sale in the current period, as shown below:

Cost of Goods Available for Sale = Beginning Inventory + Net Purchases

Step 3. Estimate the gross profit for the current period, as shown below:

Estimated Gross Profit= Historical Gross Profit Rate


x Net Sales Revenue (current period)
Step 4. Estimate the cost of goods sold for the period

Estimate Costs of Goods Sold = Net Sales Revenue (current period)


– Estimated Gross Profit

Step 5. Determine the estimated cost of the ending inventory

Ending Inventory = Cost of Goods Available for Sale


– Estimated Cost of Goods Sold

Example: Gross Profit Method


Hardin Company has the following information related to its inventory:

Net Sales for the period 130,000


Beginning inventory, cost 10,000
Net purchases for the period 90,000
Estimated historical gross profit rate on net sales 40%

Solution:
Estimated gross profit rate (given) 40%
Beginning inventory, at cost 10,000
Net purchases 90,000
Cost of goods available for sale 100,000
Less: Estimated cost of goods sold *** 78,000
Estimated cost of ending inventory 22,000

*** Net sales 130,000


Gross profit rate x 0.40
Estimated gross profit 52,000

Sales 130,000
Estimated gross profit (52,000)
Cost of goods sold 78,000
References

Intermediate Accounting Volume 1, 2019 by Valix, Peralta & Valix

You might also like