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Q. Example on gross margin method?
To demonstrate the gross margin method of computing inventory assumes that for several Years Field Company has maintained a 30 per cent gross margin on net sales. The subsequent data for 2010 are available The January 1 inventory was USD 40000 net cost of purchases of merchandise was USD 480000 and net sales of merchandise were USD 700000. As display in Exhibit 63 Field is able to estimate the inventory for 2010 December 31 by deducting the estimated cost of goods sold from the actual cost of goods available for sale.
An alternative format for computing estimated ending inventory uses the standard income statement format and solves for the one unknown (ending inventory)
We recognize that Costs of goods available for sale-Ending inventory=Cost of goods sold
Therefore (let X = Ending inventory) USD 520000 - X = USD 490000
X = USD 30000
The gross margin method isn't precise enough to be used for year-end financial statements. At year-end a physical inventory should be taken and valued by either the FIFO, LIFO, specific identification or weighted-average methods.
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