{"appState":{"pageLoadApiCallsStatus":true},"articleState":{"article":{"headers":{"creationTime":"2016-03-26T17:34:28+00:00","modifiedTime":"2016-03-26T17:34:28+00:00","timestamp":"2022-06-22T19:25:17+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"//dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"//dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"//dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"General Accounting","_links":{"self":"//dummies-api.dummies.com/v2/categories/34230"},"slug":"general-accounting","categoryId":34230}],"title":"How to Estimate Inventory with the Gross Profit Method","strippedTitle":"how to estimate inventory with the gross profit method","slug":"how-to-estimate-inventory-with-the-gross-profit-method","canonicalUrl":"","seo":{"metaDescription":"Regardless of the cost flow assumption or valuation method a company uses to record inventory on the balance sheet, the company must take a physical inventory. ","noIndex":0,"noFollow":0},"content":"<p>Regardless of the cost flow assumption or valuation method a company uses to record inventory on the balance sheet, the company must take a physical inventory. The regularity of this physical inventory varies based on company policy and the type of business.</p>\n<p>However, sometimes it’s just not feasible to take a physical inventory. After all, closing down a mom-and-pop grocery store every time a set of financial statements is prepared to take a count of inventory will have a strong negative impact on sales. To work around this problem, companies use methods to come up with as good a guess as possible to approximate actual inventory.</p>\n<p>One estimation method that’s pretty easy to use is the gross profit method. Now, you know what <i>gross profit</i> is, right? It’s the difference between net sales and cost of goods sold (COGS). Putting this in very basic terms with round numbers, if net sales are $100,000 and COGS is $75,000, gross profit is $25,000 and, stated as a percentage of selling price, the gross profit percentage 25 percent ($25,000 / $100,000).</p>\n<p>Now you can use that same 25 percent gross profit percentage to estimate ending inventory using another set of facts and circumstances. In addition to the 25 percent gross profit percentage, you need to know that there are goods available for sale at cost, totaling $155,000, and that sales at selling price equal $125,000. Whip these figures around, and the following figure gives you approximate inventory at cost.</p>\n<img src=\"//sg.cdnki.com/gross-profit-method-of-inventory-valuation-is-may-be-used-to-estimate-interim-financial-statements---aHR0cHM6Ly93d3cuZHVtbWllcy5jb20vd3AtY29udGVudC91cGxvYWRzLzMyNTgzNC5pbWFnZTAuanBn.webp\" width=\"535\" height=\"177\" alt=\"image0.jpg\"/>\n<p>The gross profit method is certainly more accurate than throwing a dart at a number board, but it’s only an estimate to be used until the physical inventory can be taken. Often inventory taking is a once-a-year extravaganza, so the gross profit percentage in use is based on past performance. Using stale sales and COGS figures may not provide truly reliable figures.</p>\n<p>However, GAAP allows the gross profit method for <i>interim statements,</i> which are financial statements for less than one year, such as monthly or quarterly statements, as long as the company discloses the use of this method.</p>","description":"<p>Regardless of the cost flow assumption or valuation method a company uses to record inventory on the balance sheet, the company must take a physical inventory. The regularity of this physical inventory varies based on company policy and the type of business.</p>\n<p>However, sometimes it’s just not feasible to take a physical inventory. After all, closing down a mom-and-pop grocery store every time a set of financial statements is prepared to take a count of inventory will have a strong negative impact on sales. To work around this problem, companies use methods to come up with as good a guess as possible to approximate actual inventory.</p>\n<p>One estimation method that’s pretty easy to use is the gross profit method. Now, you know what <i>gross profit</i> is, right? It’s the difference between net sales and cost of goods sold (COGS). Putting this in very basic terms with round numbers, if net sales are $100,000 and COGS is $75,000, gross profit is $25,000 and, stated as a percentage of selling price, the gross profit percentage 25 percent ($25,000 / $100,000).</p>\n<p>Now you can use that same 25 percent gross profit percentage to estimate ending inventory using another set of facts and circumstances. In addition to the 25 percent gross profit percentage, you need to know that there are goods available for sale at cost, totaling $155,000, and that sales at selling price equal $125,000. Whip these figures around, and the following figure gives you approximate inventory at cost.</p>\n<img src=\"//www.dummies.com/wp-content/uploads/325834.image0.jpg\" width=\"535\" height=\"177\" alt=\"image0.jpg\"/>\n<p>The gross profit method is certainly more accurate than throwing a dart at a number board, but it’s only an estimate to be used until the physical inventory can be taken. Often inventory taking is a once-a-year extravaganza, so the gross profit percentage in use is based on past performance. Using stale sales and COGS figures may not provide truly reliable figures.</p>\n<p>However, GAAP allows the gross profit method for <i>interim statements,</i> which are financial statements for less than one year, such as monthly or quarterly statements, as long as the company discloses the use of this method.</p>","blurb":"","authors":[{"authorId":9470,"name":"Maire Loughran","slug":"maire-loughran","description":" <b>Maire Loughran</b> is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. Additionally, she is a university professor of undergraduate- and graduate-level accounting classes.","_links":{"self":"//dummies-api.dummies.com/v2/authors/9470"}}],"primaryCategoryTaxonomy":{"categoryId":34230,"title":"General Accounting","slug":"general-accounting","_links":{"self":"//dummies-api.dummies.com/v2/categories/34230"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[],"relatedArticles":{"fromBook":[{"articleId":208338,"title":"Intermediate Accounting For Dummies Cheat Sheet","slug":"intermediate-accounting-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/208338"}},{"articleId":176844,"title":"What Does Intermediate Accounting Cover?","slug":"what-does-intermediate-accounting-cover","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/176844"}},{"articleId":176843,"title":"Important Differences between U.S. and International Accounting Standards","slug":"important-differences-between-u-s-and-international-accounting-standards","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/176843"}},{"articleId":175445,"title":"What Is the Securities and Exchange Commission (SEC)?","slug":"what-is-the-securities-and-exchange-commission-sec","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/175445"}},{"articleId":175443,"title":"Corporations and Equity Accounts","slug":"corporations-and-equity-accounts","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/175443"}}],"fromCategory":[{"articleId":277438,"title":"Financial Accounting: The Effect of Business Transactions","slug":"financial-accounting-the-effect-of-business-transactions","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/277438"}},{"articleId":277429,"title":"What Are Accounting Journals?","slug":"what-are-accounting-journals","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/277429"}},{"articleId":277423,"title":"How to Read Corporate Annual Reports","slug":"how-to-read-corporate-annual-reports","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/277423"}},{"articleId":277418,"title":"Showing the Money: The Statement of Cash Flows","slug":"showing-the-money-the-statement-of-cash-flows","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/277418"}},{"articleId":277410,"title":"10 Accounting Career Opportunities","slug":"10-accounting-career-opportunities","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"//dummies-api.dummies.com/v2/articles/277410"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282300,"slug":"intermediate-accounting-for-dummies","isbn":"9781118176825","categoryList":["business-careers-money","business","accounting","general-accounting"],"amazon":{"default":"//www.amazon.com/gp/product/1118176820/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"//www.amazon.ca/gp/product/1118176820/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"//www.tkqlhce.com/click-9208661-13710633?url=//www.chapters.indigo.ca/en-ca/books/product/1118176820-item.html&cjsku=978111945484","gb":"//www.amazon.co.uk/gp/product/1118176820/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"//www.amazon.de/gp/product/1118176820/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"//www.dummies.com/wp-content/uploads/intermediate-accounting-for-dummies-cover-9781118176825-203x255.jpg","width":203,"height":255},"title":"Intermediate Accounting For Dummies","testBankPinActivationLink":"","bookOutOfPrint":false,"authorsInfo":"<p><b data-author-id=\"9470\">Maire Loughran</b> is a certified public accountant who has prepared compilation, review, and audit reports for fifteen years. A member of the American Institute of Certified Public Accountants, she is a full adjunct professor who teaches graduate and undergraduate auditing and accounting classes. </p>","authors":[{"authorId":9470,"name":"Maire Loughran","slug":"maire-loughran","description":" <b>Maire Loughran</b> is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. 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Regardless of the cost flow assumption or valuation method a company uses to record inventory on the balance sheet, the company must take a physical inventory. The regularity of this physical inventory varies based on company policy and the type of business. However, sometimes it’s just not feasible to take a physical inventory. After all, closing down a mom-and-pop grocery store every time a set of financial statements is prepared to take a count of inventory will have a strong negative impact on sales. To work around this problem, companies use methods to come up with as good a guess as possible to approximate actual inventory. One estimation method that’s pretty easy to use is the gross profit method. Now, you know what gross profit is, right? It’s the difference between net sales and cost of goods sold (COGS). Putting this in very basic terms with round numbers, if net sales are $100,000 and COGS is $75,000, gross profit is $25,000 and, stated as a percentage of selling price, the gross profit percentage 25 percent ($25,000 / $100,000).
Now you can use that same 25 percent gross profit percentage to estimate ending inventory using another set of facts and circumstances. In addition to the 25 percent gross profit percentage, you need to know that there are goods available for sale at cost, totaling $155,000, and that sales at selling price equal $125,000. Whip these figures around, and the following figure gives you approximate inventory at cost.
The gross profit method is certainly more accurate than throwing a dart at a number board, but it’s only an estimate to be used until the physical inventory can be taken. Often inventory taking is a once-a-year extravaganza, so the gross profit percentage in use is based on past performance. Using stale sales and COGS figures may not provide truly reliable figures.
However, GAAP allows the gross profit method for interim statements, which are financial statements for less than one year, such as monthly or quarterly statements, as long as the company discloses the use of this method.