The steps in calculating ending inventory under the gross margin method excludes

Question

The steps in calculating ending inventory under the gross margin method excludes which of the following:

Estimate gross margin (based on net sales) using the same gross margin rate experienced in prior accounting periods.

Determine the impact of estimated gross margin on profit ratios and revise as necessary.

Determine estimated cost of goods sold by deducting estimated gross margin from net sales.

Determine estimated ending inventory by deducting estimated cost of goods sold from cost of goods available for sale

Explanation / Answer

The steps in calculating ending inventory under the gross margin method excludes the impact of estimated gross margin on profit ratios and revise as necessary.

Gross profit margin is a method of inventory valuation and hence it does not involve calculation of profitability ratios and revision thereof .

It primarily focuses on calculation of valuation of ending inventory by the below formula:

Ending inventory=Cost of goods available for sale-Cost of goods sold

Cost of goods available for sale=Ending stock of previous period +Purchases

Cost of goods sold is calculating by deducting the profit margin from the sales amount.

Cost of goods sold =Sales (100-Profit margin)

Lastly , the difference between the cost of goods available for sale and cost of goods sold is used for inventory valuation.

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