INVENTORY
ESTIMATION
Methods of Estimating Inventories
I. Gross Profit Method
2. Retail Inventory Method
Retail Inventory Method
FREQUENTLY ASKED QUESTIONS:
1. How much is the total Estimated Ending
Inventory at COST?
2. How much is the total Estimated Ending
Inventory at RETAIL?
ITEMS BOTH AT COST AND RETAIL
Beginning Inventory Purchase RETURNS Departmental transfer-Out/Credit
Purchases Departmental transfer-In/Debit ABNORMAL Loss
( ) ( )
( )
( )
4,800,000 7,500,000
[Link] at RETAIL
( )
2. Adjusted Net Sales 6,750,000
4,800,000 - 340,000
= 65%
7,500,000 - 640,000
4,800,000
= 64%
7,500,000
4,800,000
= 60%
7,500,000 + 500,000
CONVENTIONAL / CONSERVATIVE AVERAGE FIFO
TGAS at RETAIL 7,500,000 TGAS at RETAIL 7,500,000 TGAS at RETAIL 7,500,000
Adjusted Net Sales (6,750,000) Adjusted Net Sales (6,750,000) Adjusted Net Sales (6,750,000)
Estimated Ending inventory at RETAIL 750,000 Estimated Ending inventory at RETAIL 750,000 Estimated Ending inventory at RETAIL 750,000
Cost Ratio 60% Cost Ratio 64% Cost Ratio 65%
Estimated Ending inventory at COST 450,000 Estimated Ending inventory at COST 480,000 Estimated Ending inventory at COST 487,500
1. Total Goods Available for Sale at Retail
COST RETAIL/MARKET
Beg. Inventory 412,400 620,000
Purchases 2,614,100 4,275,500
Freight-In 40,000
Purchase Returns (10,000) (28,000)
Purchase discount&allowance (14,200)
Markup 146,900
Markup cancellation (25,000)
Markdown (116,000)
Markdown cancellation 18,000
Departmental transfer-in 25,700 51,600
Departmental transfer-out (31,500) (68,000)
Abnormal loss (45,000) (50,000)
Total Goods Available for Sale 2,991,500 4,825,000
2. ADJUSTED NET SALES
Sales 3,200,000
Sales returns (48,500)
Employee discount 15,500
Normal Loss 150,000
Adjusted Net Sales 3,317,000
NOTE: Sales Discounts and Sales Allowances are disregarded in
computing the Adjusted Net Sales
3. COST RATIO = TGAS at COST
TGAS at RETAIL
AVERAGE method 2,991,500/4,825,000= 62%
FIFO method 2,991,500-412,400/4,825,000-620,000
2,579,100/4,205,000= 61.33%
2,991,500/4,825,000 + 98,000*
CONSERVATIVE method
2,991,500/4,923,000= 60.77%
* Net Markdown= 116,000 - 18,000
AVERAGE APPROACH
Total Goods Available for Sale at Retail 4,825,000
Adjusted Net Sales (3,317,000)
Estimated Ending Inventory at Retail 1,508,000
Cost Ratio x 62%
Estimated Ending Inventory at Cost 934,960
FIFO APPROACH
Total Goods Available for Sale at Retail 4,825,000
Adjusted Net Sales (3,317,000)
Estimated Ending Inventory at Retail 1,508,000
Cost Ratio x 61.33% 934,960
Estimated Ending Inventory at Cost 924,856 924,856
CONSERVATIVE/CONVENTIONAL APPROACH 916,412
Total Goods Available for Sale at Retail 4,825,000
Adjusted Net Sales (3,317,000)
Estimated Ending Inventory at Retail 1,508,000
Cost Ratio x 60.77%
Estimated Ending Inventory at Cost 916,412
Gross Profit Method
FREQUENTLY ASKED QUESTIONS:
1. How much is the total Estimated COST of
Inventory SHORTAGE?
2. How much is the total Estimated COST of
Inventory LOSS due to casualty?
1. How much is the total Estimated COST of Inventory SHORTAGE?
Total Goods Available for Sale xx
Estimated Cost of Goods Sold (xx)
Estimated COST of Ending Inventory xx
Inventories, per Count (xx)
Estimated COST of Inventory Shortage xx
1,820,000
(1,505,000)
315,000
(160,000)
155,000
TGAS = 1,000,000 + 800,000 + 20,000 = 1,820,000
NET SALES = 2,200,000 - 50,000 = 2,150,000
ESTIMATED COGS = 2,150,000 x 70 % = 1,505,000
2. How much is the total Estimated COST of Inventory LOSS due to casualty?
Total Goods Available for Sale xx
Estimated Cost of Goods Sold (xx)
Estimated COST of Ending Inventory xx
Damaged Inventories (xx)
Undamaged Inventories (xx)
Estimated COST of Inventory Loss xx
TGAS = 300,000 + 4,200,000 = 4,500,000
4,500,000
(2,832,000) NET SALES = 3,580,000 - 40,000 = 3,540,000
1,668,000
ESTIMATED COGS = 3,540,000 / 125 % = 2,832,000
(26,000)
UNDAMAGED GOODS AT COST = 30,000 / 125 %
(24,000)
= 24,000
1,618,000