Gross profit is a company’s residual profit after selling a product or service; it involves deducting the cost associated with the production and sales. To calculate gross profit it involves examining the income statement. In the income statement you take the revenue and subtract the cost of goods sold. This is also called gross margin and gross profit. Gross profit is needed in a company because it shows how efficiently management uses labor and supplies in the production process (Investopedia, 2012). Inventory is stocks, goods, merchandise, assets, and products. It can be things a company make on their own or things that a company has bought from a distributor. Inventory is something that can be sold for a higher price than what it cost to make a profit. Inventory is classified to be a current asset. The company intends to see them within a year from the date it is listed on the balance sheet (Accounting Basics, 2012).
The Gross profit method is used in inventory to estimate the value of ending inventory on the base of percentage of gross profit. Companies must determine the percentage of gross profit at the end of year after preparing the financial statements. Gross profit is calculated as a percentage of sales or net sales by dividing gross profit by sales. Gross profit is also calculated by Cost of goods sold or cost of sales by dividing gross profit by cost of goods sold. To compute the ending inventory there are some steps to take. The first step in determining the gross profit rate as a percentage of sales or a percentage of cost “cost of goods sold”, if the percentage was of cost , you must convert this percentage to a percentage of sales because the cost Gross profit on sales = percentage markup on cost / (100% + percentage markup on cost). For example if the % was 25% of cost, to convert this percentage from cost to sales it will be computed as Gross Profit on sales =0.25/ (1+0.25) ×100=20% (Wabraan, n.d.).
Businesses that sell goods need to...
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