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Accounting 3

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.

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Accounting 3

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  1. Accounting 3 Chapter 22 Section 3

  2. 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.

  3. 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)

  4. 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

  5. Example: Estimated Beg. Inv. : $238,750Actual Net Purchase for January: $125,450Actual Net Sales for January: $206,250Estimated 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

  6. 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.

  7. 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)

  8. 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

  9. Income Statement % of Net Sales Evans Company For Month Ended June 30, 2007 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

  10. 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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