Gross Profit Method of Calculation for Inventory

When disaster strikes, a business faces the challenge of itemizing its losses in order to file insurance claims or prepare financial statements. Especially critical is determining the inventory value of what has been destroyed. One method for determining the inventory value is the gross profit method.

Things You'll Need

• Financial statements
• Invoice copies

Instructions

1. Calculate the gross profit percentage. Using prior period income statements, divide the gross profit by the net sales. This calculates the gross profit percentage.

2. Compile the merchandise sales since the most recent inventory valuation date. This amount can be found by pulling all customer invoices mailed since the inventory date. Add the inventory totals together for a period-to-date merchandise sales figure.

3. Multiply the period-to-date merchandise sales figure by the gross profit percentage. This calculates the gross profit amount for the period-to-date. Subtract this amount from the period-to-date merchandise sales figure. This calculates the cost of goods sold for the period-to-date.

4. Determine the value of merchandise sold since the previous inventory valuation. For each invoice mailed to a customer, an accompanying entry for the inventory cost should have been recorded. Add the inventory cost which applies to each invoice for the period-to-date. This calculates the value of merchandise sold during this time.

5. Add the cost of merchandise sold for the period-to-date to the most recent inventory valuation. This is the total cost of goods available for sale.

6. Subtract the cost of goods sold for the period-to-date from the total cost of goods available for sale. This is the inventory valuation.

Tips & Warnings

• Maintain backup copies of all accounting documentation off-site. This reduces the potential of losing these records along with the inventory in the event of a fire.

• This method does not calculate an exact inventory valuation. Instead it estimates the most likely value based on available information.

References

• AccountingCoach: What is the Gross Profit Method?
• Northeastern University College of Business: Gross Profit Method
• AccountingCoach: Inventory and Cost of Goods Sold