How to Calculate Gross Profit With Inventory

Use the gross profit method of inventory to calculate the amount of ending inventory.

The gross profit method of inventory is a way to estimate the ending inventory of a business during a given time period. Some businesses use the gross profit method to do an estimate of the monthly inventory when performing a physical inventory is not possible or cost-effective. This method is also used to estimate inventory losses due to theft or damage. To calculate the gross profit method of inventory, some basic sales information and a simple equation are required.

Instructions

1. Calculate your inventory's gross profit percentage. A company that has an item that costs $70 and sells for $100 has a gross profit percentage of 30 percent of the sale price ($100 - $70 = $30, or 30 percent). If the company sells $100,000 of inventory, then they have a cost of goods sold of $70,000 ($100,000 - $30,000 = $70,000).

2. Calculate the company's cost of goods sold. Subtract the gross profit percentage from 100 percent to find the cost of goods sold percentage. From the above example, if the company sells $100,000 of inventory then they have a cost of goods sold of $70,000 or 70 percent of sales ($100,000 (100%) - $30,000 (30%) = $70,000 (70%)).

3. Find the cost of the inventory during the last accounting period and the amount of goods purchased since. Use the following example: the last accounting period was at the end of December, and the amount was $20,000. The current month is June and $60,000 of inventory was purchased since December.

4. Calculate the estimated cost of goods available in June. Add the inventory cost from December to the amount of inventory purchased between December and June to find the estimated cost of goods available which is $80,000 in this case ($20,000+$60,000=$80,000).

5. Calculate the cost of goods sold. Multiply the amount of total sales by the cost of goods sold percentage, which in this case results in $70,000 ($100,000 in sales X .70 = $70,000).

6. Calculate the estimated inventory at the end of June using the gross profit method. Subtract the cost of goods sold from the estimated cost of goods available to find the estimated inventory at the end of the month. The estimated inventory in this example is $10,000 ($80,000 - $70,000 = $10,000).

7. Divide the estimated inventory result by the cost of an individual unit to find out how many units are left on hand. If each unit costs $70, then there are approximately 143 units in stock ($10,000 / $70 = 142.8 units).

References

• Accounting Coach: What is the gross profit method of inventory?