GROSS

PROFIT
METHOD

GROSS PROFIT METHOD

Thegross profit methodis a technique for
estimating the amount of endinginventory. 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 causes.

BASIC FORMULA UNDER THE GROSS

PROFIT METHOD

Goods Available for sale (GAS)

xx
less: Cost of Sales
xx
Ending Inventory
xx

COMPUTATION FOR GOODS AVAILABLE

FOR SALE
Beginning Inventory
Purchases
Less: Purchases returns and allow
Freight in

xx
xx
(xx) xx
xx

Net cost of Purchases

xx

Goods Available for Sale

xx

COMPUTATION FOR COST OF

SALES
A.Net Sales multiplied by cost ratio
This formula is used when the gross profit rate is
based on sales.
B. Net Sales divided by sales ratio
This formula is used when the gross profit rate is
based on cost.

ILLUSTRATION
BASED ON SALES

Assume the company obtain the following

information:
Beginning Inventory

P 100, 000

Net purchases

500, 000

Net Sales

700, 000

Gross profit rate based on sales

40%

The ending inventory is compute as follows:

Beginning inventory
Net Purchases
Goods available for sale
000
Less: Cost of Sales:
Net Sales
Multiply by cost ratio
000
Ending inventory

100, 000
500, 000
600,
700, 000
60% 420,
180, 000

OBSERVE THE FOLLOWING:

Amount Percent
Net Sales 700, 000100%
Cost of Sales 420, 000

60%

Gross profit on sales

280, 00040%

The cost of sales is computed by multiplying the sales

by the cost ratio. Thus, P700, 000 times 60% equals P
420, 000

ILLUSTRATION
BASED ON COST
The following data relate to the current year.
Beginning inventory

P 200, 000

Net purchases
Net sales

1000, 000
1260, 000

Gross profit rate based on cost

40%

Observe the following:

Net Sales
Cost of Sales
Gross profit on cost

Amount
Percent
1, 260, 000
140%
900, 000
100%
360, 000

40%

The cost of sales is computed by dividing the net

sales by the sales ratio.Thus, P1, 260, 000
divided by 140% equals
P900, 000

The ending inventory is compute as follows:

Beginning inventory
200, 000
Net Purchases
1,000,
000
Goods available for sale
1,200,
000
Less: Cost of Sales:
Net Sales
1,260, 000
Divided by sales ratio
140%
900,
000
Ending inventory
300, 000

End of
Discussion

Exercise:
The following data are gathered for the current
year:
Inventory, beginning
P 650, 000
Purchases
2, 500, 000
Purchases returns and allow.
20, 000
Freight
10, 000
Sales
3, 200, 000
Sales returns
300, 000
The ending inventory is computed under
each of the ff. assumptions:
a. Gross profit rate is 25% on sales

Solution:
A. Gross profit rate is 25% on sales
Inventory,beg
P650, 000
Purchases
P2,500, 000
Less: purchase rets & allow.
( 20, 000 )
Net purchases
2, 480, 000
Add: freight in
10, 000
Net cost purchases
2, 490, 000
Goods available for sale
P3,140, 000
Less: Cost of Sales
Sales
3, 200, 000
Less: Sales return
300, 000
Net Sales
2, 900, 000
Multiply by cost ratio
75%
2, 175, 000
Ending Inventory

P 965, 000

Solution:
A. Gross profit rate is 25% on cost
Inventory,beg
P650, 000
Purchases
P2,500, 000
Less: purchase rets & allow.
( 20, 000 )
Net purchases
2, 480, 000
Add: freight in
10, 000
Net cost purchases
2, 490, 000
Goods available for sale
P3,140, 000
Less: Cost of Sales
Sales
3, 200, 000
Less: Sales return
300, 000
Net Sales
2, 900, 000
Divided by cost ratio
125%
2, 320,
000
Ending Inventory
P 820, 000