Gross Margin method: this method is used to estimate ending inventory when a physical count is impossible (i.e., fire theft etc) or may be used for interim financial statements. However, this method cannot be used for year-end inventory determination.

The gross margin uses the companys historical average gross margin percentage to estimate ending inventory.

Steps:

Compute goods available for sale (GAS)

Compute estimated COGS by multiplying net sales by the estimated COGS %

Compute estimated ending inventory by subtracting estimated COGS (2-1)

Example:

Assume ABC Co. averaged a gross margin (profit) of 40% of net sales. In addition, the following information about the companys purchases and sales are given:

Inventory January 1, 1999 $30,000

Purchases during 2000 140,000

Purchase Returns and Allowances 4,000

Freight in 1,000

Sales 205,000

Sales Returns 5,000

Required: Find estimated ending inventory using the gross margin method, and record the entry if the company had (a) no insurance, (b) 100% insurance reimbursement (c) 90% reimbursement.