Chapter 8
Inventory Valuation
238
For example, suppose that Van
Der Linden must prepare financial
statements for the quarter and needs to
value its inventory. It will use the gross
profit method and is shown in Figure
8.13.
Based on an analysis of gross margin in
previous years, a figure of 50% is used
for current calculations.
Additionally, the following financial
numbers were taken from the
accountant’s general ledger
Sales Revenue: $100,000
Opening Inventory: $3,000
Purchases: $70,000
Van Der Linden's accountant will use
these numbers to estimate the value of
inventory.
The cells with a question mark are those
that must be calculated step-by-step to
complete the estimation process.
If the gross margin is 50% (marked in red) then it is applied to the sales figure (marked in blue) to
calculate the estimated gross profit, shown in Figure 8.14 ($100,000
3
50% = $50,000).
Next, the cost of goods sold figure is
estimated by subtracting the estimated
gross profit from sales revenue, as
shown below.
Sales − Gross Profit = COGS
$100,000 − $50,000 = $50,000
The $50,000 COGS is placed into the
chart and marked in grey in Figure 8.15.
The final step is to estimate the balance of closing inventory. This is done by subtracting COGS
from the cost of goods available for sale as shown below.
Sales Revenue
$100,000
Cost of Goods Sold
Opening Inventory
3,000
Purchases
Cost of Goods Available for Sale
73,000
Closing Inventory
Cost of Goods Sold
?
?
Gross Pro t (Gross Margin =
50%
)
?
FIGURE 8.13
70,000
Sales Revenue
100,000
Cost of Goods Sold
Opening Inventory
3,000
Purchases
Cost of Goods Available for Sale
73,000
Closing Inventory
Cost of Goods Sold
?
Gross Pro t (Gross Margin = 50%)
$50,000
?
FIGURE 8.14
70,000
Sales Revenue
50,000
FIGURE 8.15
Cost of Goods Sold
Opening Inventory
Purchases
Cost of Goods Available for Sale
Closing Inventory
Cost of Goods Sold
Gross Pro t (Gross Margin = 50%)
100,000
3,000
70,000
73,000
?
50,000
