Inventory Estimation Flashcards
Procedures for approximating the value of inventory:
Gross Profit Method
Retail Inventory Method
Based on the assumption that the rate of gross profit remains approximately the same from period to period and therefore the ratio of cost of goods sold to net sales is relatively constant from period to period.
Gross Profit Method
The COGS is computed in Gross Profit Method as follows:
-Net sales multiplied by cost ratio
(if gross profit rate is based on sales)
-Net sales divided by sales ration
(if gross profit is based on cost)
In Gross Profit Method, sales allowance and sales discount are…
IGNORED
(not deducted from sales)
This method is often used in the retail industry for measuring inventory or a large number of rapidly changing items with similar margin for which it is impracticable to use other costing method.
Retail Inventory Method
Accounting treatment:
- Purchase discounts
Deducted from purchases at cost.
Accounting treatment:
- Purchase returns
Deducted from purchases at cost and at reail
Accounting treatment:
- Purchase allowances
Deducted from purchases at cost.
Accounting treatment:
- Sales discount
Ignored
Accounting treatment:
- Sales allowances
Ignored
Accounting treatment:
- Sales return
Deducted from sales.
Accounting treatment:
- Sales return AND allowances
Deducted from sales.
Accounting treatment:
- Freight-in
Added to purchases at cost.
Accounting treatment:
- Employee discount
Added to Sales.
Accounting treatment:
- Normal losses
Deducted from goods available for sale at retail
Accounting treatment:
- Abnormal losses
Deducted from goods available for sale at cost and at retail.
Accounting treatment:
- Departmental transfer-in
Added to purchases at cost and at retail.
Accounting treatment:
- Departmental transfer-out
Deducted from purchases at cost and at retail.
Approaches in the use of Retail Method:
- Conservative/Conventional/LCNRV
- Average Cost Approach
- FIFO Approach
This approach is also known as the lower of the average cost or market.
Conservative Approach.
The conservatie approach _________ net markup
and _________ net markdown in determining the cost ratio in order to arrive at a conservative cost.
includes; excludes
This includes both net markdown and net markdown in determining cost ratio.
Average cost
This is based on the assumption that markup and markdown apply to goods purchase during the year and not to beginning inventory.
FIFo Approach
