CHAPTER 6
PAGE 182-185
 Estimating the Inventory
o Gross Profit Method—estimating inventory by using the
previous years’ percentage of gross profit on operations
 A business that keeps periodic inventory and
prepares interim monthly financial statements needs
a cost to use for monthly ending inventory
 Assumes that a continuing relationship exists
between gross profit and net sales
 ESTIMATE—not absolutely accurate
o Retail Method—estimating inventory using a percentage
based on both cost and retail prices
 Business must keep separate records of both cost
and retail prices for net purchases, net sales, and
beginning merchandise inventory
Merchandise Available
for Sale at Cost
÷
Merchandise Available = Percentage
for Sale at Retail
 Many business used the gross profit method because it does
not require keeping separate cost and retail price records
 Businesses that keep a perpetual inventory or has a
computerized inventory system may have the figures needed
for the retail method readily available
 Merchandise Inventory Turnover
o Two measures of speed with which merchandise
inventory is sold are:
1. Merchandise Inventory Turnover Ratio
2. Average Number of Days’ Sales in Merchandise Inventory
o Merchandise Inventory Turnover Ratio—the number of
times the average amount of merchandise inventory is
sold during a specific period of time
o
o A 5.4 turnover ratio means that the business sold the
average merchandise inventory 5.4 times during the
current year.
o Ratios are compared to industry standards
o If too low, managers need to better control the quantity of
merchandise inventory on hand
o Average number of days’ sales in merchandise
inventory—the period of time needed to sell an average
amount of merchandise inventory