METHODS OF ESTIMATING THE AMOUNT OF INVENTORY:

1. The gross profit method

2. The retail method

GROSS PROFIT METHOD

a. The gross profit is based on sales
b. The gross profit is based on cost

1. On September 30, 2020, a fire broke in the warehouse of AB Company causing severe damaged to
the company’s inventory. The following information is available from the company’s records for the
nine months ended September 30, 2020.
Inventory, Jan. 1 P550,000
Purchases 3,000,000
Net sales 3,640,000

A physical inventory after the fire disclosed salvaged merchandise marked to sell for P80,000 had an
estimated realizable value of P50,000.

QUESTIONS:
A. How much is the estimated cost of merchandise lost by fire if the company’s gross profit rate is
30% of sales. (COST OF GOODS SOLD IS 70% OF SALES)

B. How much is the estimated cost of merchandise lost by fire if the company’s gross profit rate is 30% of
cost. ( SALES IS 130%) COST IS 100%

The gross profit rate is not given: GROSS PROFIT RATE IS ( AMOUNT OF GP/AMOUNT OF NET SALES)

2. On October 31, 2020, a flash flood caused damage to the warehouse of Moderna Company. Since
the company’s inventory is not covered by any insurance Moderna suffered a significant loss from this
flood. The following information is available from the company’s accounting records.
Jan. 1 to Oct. 31,2020 2019
Merchandise inventory, beginning P400,000 -
Purchases, net 2,320,000 2,200,000
Sales 3,120,000 2,400,000

At the beginning of 2020, the company changed its policy on the selling prices of the merchandise in
order to produce a gross profit rate of 5% greater than the gross profit rate in 2019. Undamaged mdse.
marked to sell at P100,000 were salvaged. Damaged mdse. Originally marked to sell at P30,000 had an
estimated realizable value of P8,000

THE GROSS PROFIT RATE FOR 2019= AMOUNT OF 2019 GP/2019 NET SALES

How much is the estimated inventory loss from the flood?_P458,000

Under the gross profit method of estimating the amount of inventory, SALES DISCOUNT is not considered
in the computation of net sales.

3. On September 30, 2019, a fire caused damaged to the inventory of Sputnik Company. A physical
inventory after the fire disclosed salvaged goods that can be sold for P50,000. The company’s GP
rate is 30% of net sales. The following information is available from the company’s records for the
nine months ended September 30, 2019.

Inventory, January 1 P550,000

Total purchases received and recorded, Jan. 1 to Sept. 30 3,000,000
Freight cost of goods purchased 60,000
Credit memo received on goods purchased 200,000
Total discounts taken on purchases 80,000
Invoice received for goods purchased but still in transit shipped Sept.
30, 2019, FOB shipping point. 120,000
Total sales delivered and recorded, Jan.1 – Sept. 30 3,600,000
Unrecorded sales invoice for goods delivered 300,000
Total sales returns accounted and recorded, Jan. 1-Sept. 30 160,000
Total sales discounts taken by customers 40,000
 How much is the inventory fire loss? P662,000

4. The following information pertains to Accord Company for the year 2020:
Sales P2,200,000 Freight cost on purchases P20,000
Inventory, Jan. 1, 2020 1,000,000 Freight cost on mdse. sold 30,000
Purchases 800,000 Sales discount 100,000

Inventory inside the company’s warehouse, per actual count on December 31, 2020-P160,000;
credit memo issued to customers for goods returned and received-P50,000; credit memo to
customers for mdse. to be returned, Jan. 2, 2021-P40,000. Accord company is satisfied that all sales
and purchases have been fully and properly recorded. The company’s gross profit is 30% of sales.
How much is the estimated shortage in inventory?P155,000

5. On October 10, 2020, a flood caused damage to the merchandise stored in the warehouse of Seneca
Company. You were asked to submit an estimate of the merchandise destroyed in the warehouse.
The following data were established:

2019 net sales, P8,000,000 matched against cost of P5,600,000.

Merchandise inventory, January 1, 2020 was P2,000,000, 90% of which was in the warehouse and
10% in downtown showroom. From January 1, 2020 to date of flood, you ascertained the following:
Invoice value of purchases (all stored in the warehouse), P1,000,000; freight inward, P40,000;
purchase returns, P60,000. Cost of merchandise transferred from the warehouse to showroom was
P80,000 and net sales from January 1, to October 10, 2020 (all warehouse stock) was P3,200,000.

If the gross profit rate in 2020 is the same with that of the previous year, what was the estimated
cost of merchandise destroyed by the flood?_P460,000

THE RETAIL METHOD of ESTIMATING THE COST OF INVENTORY

A. FIFO RETAIL
B. AVERAGE RETAIL

THE RETAIL METHOD OF ESTIMATING THE COST OF INVENTORY

a. Average retail
b. FIFO retail

Illustration:
Cost Retail
Beginning inventory P70,000 P126,000
Purchases 340,000 438,000
Purchase returns (20,000) (24,000)
Purchase allowances (2,000)
Purchase discounts (1,200)
Freight in 4,000
Mark-ups (net of cancellations) 24,000
Mark-downs(net of cancellations) (10,000)
Abnormal losses (18,000) (22,000)
Departmental transfers-out (8,800) (12,000)
Goods available for sale- FOR FIFO RETAIL P294,000 P394,000
Goods available for sale- FOR AVERAGE RETAIL P364,000 P520,000

Note: Under FIFO Retail, the beginning inventory IS NOT INCLUDED in the computation of goods
Available for sale, for the computation of cost percentage.

Cost-to-retail ratio:
a. for FIFO Retail:
Goods available for sale, AT COST - P294,000 = 74.62
Divide by Goods avail. For sale AT RETAIL - 394,000
Means that cost is 74.62 of selling price or retail price

b. for Average Retail:

Goods available for sale- AT COST P364,000 = 70%
 Goods available for sale- AT RETAIL P520,000

Goods Available For Sale, At Retail P520,000

Less: Sales (net of sales returns) (365,000)
Employee discounts (1,500)
Normal losses (2,500)
Ending inventory, At retail 151,000

Computation of ESTIMATED COST OF ENDING INVENTORY under FIFO Retail:

Ending inventory, At retail -----------------------P151,000
Multiply by cost percentage, FIFO-------------- 74.62%
Estimated Cost Of Ending Inv. (FIFO retail) P 112,676

Computation of ESTIMATED COST OF ENDING INVENTORY under AVERAGE Retail:

Ending inventory, At retail --------------------------- P151,000
Multiply by cost percentage, AVERAGE----------- 70%
Estimated Cost Of Ending Inv.(AVERAGE retail) P 105,700

Problem 1.

ST department store uses the retail method of inventory. At the end of June, records of the company
provided the following information: Inventory, June 1, at cost – P355,000 at cost; at retail, P750,000.
Purchases during June, at cost-P2,400,000; at retail-P4,000,000; Sales during June –P3,500,000.

Questions:
1. How much is the estimated cost of June 30, inventory computed under FIFO retail method? 750,000
2. How much is the estimated cost of goods sold under FIFO retail?2,005,000
3. How much is the estimated cost of June 30, inventory computed under Average retail method? 725,000
4. How much is the estimated cost of goods sold under FIFO retail? 2,030,000

2. The retail inventory method is used by Rustang Dept. Stores. The records of inventory, purchases
and sales for the year 2020 are given below:
Cost Retail
Beginning inventory P185,700 P202,000
Purchases 339,380 458,000
Purchase allowance 11,000
Freight in 7,300
Departmental transfers- in 2,000 3,000
Additional Mark-ups 12,000
Mark-up cancellations 2,500
Inventory shortage 7,000
Sales (including sales of P4,500 which were marked
down from P6,000 374,000

How much is the estimated cost of ending inventory using:

1. Average retail method 226,200
2. FIFO Retail method 208,800

3. Manel’s Trading uses the retail inventory method to estimate inventory. The following information was
obtained from the accounting records for the year ended December 31, 2020.
At cost: Inventory Jan. 1, P617,000; Purchases – P1,281,000; Purchase returns – P21,000; freight in –
P31,000;
At retail: Inventory, Jan. 1, P1,057,000; Purchases – P2,158,000; Purchase returns – P35,000; Sales –
P2,365,000; Sales returns – P62,000.
How much is the inventory pilferage if the physical count revealed an ending inventory at retail of P780,000?
__58,200

4. Robinsons Trading uses average retail method of estimating inventory. The following information is taken
from the company’s accounting records.
Cost retail
Beginning inventory P23,000 P60,000
Purchases 120,000 220,000
Net mark-ups 20,000
 Net markdowns 40,000
Sales 180,000

What is the estimated cost of ending inventory? 44,000

5. The following data is available for MS company.

Cost retail
Inventory, January 1 P47,075 P70,025
Purchases, net 213,327 306,375
Freight-in 3,400
Sales 320,500
Additional mark ups 18,900
Cancellation of additional mark ups 7,800
Markdowns 10,640
Physical inventory, Dec. 31, at retail 39,390

The company uses the retail method. How much is the estimated loss from inventory shortage? 11,879

6. Google Company’s records indicated the following information>

12/31/20 1/1/20
Inventory (based on physical count) P110,000 P180,000
Accounts receivable 900,000 700,000
Accounts payable 250,000 300,000
Collection from customers 2,800,000
Payment to suppliers 2,550,000

All sales and purchases are on credit. The company’s gross profit rate based on cost has remained constant
at 25% in recent years. What is the estimated inventory shortage? 170,000

7. Examination of the records of Bass Company for the year ended December 31, 2020 revealed the ff:

a. Inventory at January 1, 2020 was overstated by P71,000 because some inventories were counted
twice on Dec. 31, 2019.
b. Goods in transit from a supplier on Dec. 31, 2020 under FOB shipping point were appropriately
recorded as purchases but were not included in the physical count, P96,000.
c. The company recorded as sales a P60,000 invoice price of goods shipped to customers on Dec. 30.
The goods costing P52,000 were in transit at Dec. 31, and were excluded from the ending inventory.
60% of these goods were shipped FOB shipping point, while the remaining goods were shipped FOB
destination.
d. Purchases of P100,000 were recorded when payment was made in 2020, although the goods were
received in 2019 and were included in the 2019 ending inventory.
e. Profit before income tax and before adjustments for the above items was P658,000

How much is the correct profit before income tax for year 2020? 921,800

7. Glory Company reported Inventory of P360,000 at December 31, 2020. The following data were
gathered to confirm the reported inventory.
Inventory, December 31, 2019 P320,000
Purchases during 2020 1,410,000
Cash sales during 2020 350,000
Shipments received on December 31, 2020 included in the physical
inventory, but not yet recorded as purchases. 10,000
Deposits made with suppliers entered as purchases. The goods were
not received during 2020. 20,000
Collections on accounts receivable during 2020. 1,800,000
Accounts receivable, December 31, 2019 250,000
Accounts receivable, December 31, 2020 300,000
Gross profit percentage on sales 40%

What is the estimated inventory shortage at December 31, 2020? P40,000