Under this method, we estimate the ending figure of the closing inventory based on the gross profit percentage. In this approach, we assume that the gross profit % remains constant during the reporting period. This method is also known as Gross Profit Method.
Procedure to calculate ending inventory under the Gross profit method
- Calculate cost of goods available for sale by adding opening inventory cost and cost of purchases during the reporting period
- Calculate estimated cost of goods sold by multiplying sales figure with 1 – gross profit percentage.
- Now, subtracts figure calculated in step 2 from the figure calculated in step 1 to arrive at ending/ cosing inventory figure.
Gross margin method is not an acceptable method in International Financial Reporting Framework and US GAAP (Generally accepted accounting principles.
Amount in US $
Opening balance – inventory 30,000
Total purchases in the period 370,000
Import duties on purchases 10,000
Cost of goods available for sale 410,000
Sales for the period 400,000
Gross Profit – 45% 180,000
Estimated cost of sale 220,000
Estimated cost of closing inventory 190,000