How to Figure Ending Inventory With a Gross Profit Ratio

The gross profit method is an inexpensive way to estimate inventory.

Inventory is usually counted once a year because it can be a fairly time-consuming process. You can use the gross profit method for getting a snapshot of the inventory for planning purposes, or if there has been fire or flood damage to your warehouse and you need to file an insurance claim.

Instructions

1. Calculate the gross profit ratio, or gross profit margin, from the most recent physical inventory count. This is equal to the gross profit divided by sales multiplied by 100. The gross profit is equal to sales minus cost of goods sold (COGS), which is the value of the inventory at cost that was sold. For example, if your gross profit was $30 for every $100 in sales last year, then use the gross profit ratio of 30 percent to estimate your inventory.

2. Get the ending inventory from the most recent physical inventory count. If the physical inventory count at the end of last year was $100, that is the beginning inventory for the current year.

3. Add all purchases you made this year to the beginning inventory. Continuing with the example, if you made $50 worth of purchases, the total inventory available for sale is $50 plus $100, or $150. This is also referred to as the cost of goods available for sale.

4. Calculate sales for the current year. Most businesses track sales on almost a daily basis, so this information should be readily available to you. The gross profit method assumes that all of your sales are coming from inventory.

5. Calculate the gross profit by multiplying sales by the gross profit ratio. For example, if sales for the current year are $60, then your gross profit is $60 times 30 percent, or $18.

6. Calculate COGS by subtracting the gross profit from sales. In the example, COGS is equal to $60 minus $18, or $42.

7. Estimate the ending inventory by subtracting COGS from the cost of goods available for sale. To wrap up the example, the ending inventory is equal to $150 minus $42, or $108.

References

• Accounting Scholar: Chapter 3.7 - Gross Profit Method of Estimating Inventory
• Accounting Coach: Inventory and Cost of Goods Sold