Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University The cost ratio is applied to ending inventory at retail prices to estimate ending invento cost The retail method merely provides an inventory estimate. The physical inventory can then be ompared to the estimated inventory. Any difference will be an estimate of shortages due to breakage, loss, or theft. At least once a year, a company should take a physical inventory to correct any errors or shortages Gross profit method The gross profit method is used to estimate inventory for insurance purposes after a break ire, or flood, or for checking the accuracy of a physical inventory count. The gross profit method uses the past gross profit rate to estimate the ending inventory as the difference between goods available for sale and cost of goods sold. It is an approximation technique that applies an estimated gross profit rate to net sales. Sales-COGS Gross profit ratio sales The gross profit ratio is applied to estimate the ending inventory using the following formul Net sale at retailx (I-gross profit ratio)=Estimated cost of goods sold Goods available for sale at cost Estimated cost of goods sold Estimated ending inventory at cost The gross profit rate is an average of the percentages for many products. As a result, estimated inventory represents an approximation. If prices during the current period differ from normal conditions, the gross profit method will yield less-than-accurate results Discussion Case: Northeast Pharmaceutical When preparing financial statement of 1996, Northeast Pharmaceutical recorded RMB 21, 280,000 expenses as inventory cost, which carries to next years beginning inventory. As a result, the bottom line is RMB 19, 950,000 profits, instead of a big loss. This was discovered and was fined by CSrC as securities fraud Required (1) What's the difference between expenses and inventory costs? (2) What are the impacts of inventory errors on financial statements (3) Why Northeast Pharmaceutical chose to report false income numbers? (4) How to prevent the occurrence of such kind of cases Summary (1) Inventory includes all goods owned by a company and held for sale (2)Costs of merchandise inventory include all expenditures necessary to bring an item to a saleable condition and location (3)There are four methods to assigning costs to inventory: specific identification, FIFO, LIFO and average cost. The average cost method smoothes out purchase price changesTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 5 The cost ratio is applied to ending inventory at retail prices to estimate ending inventory at cost. The retail method merely provides an inventory estimate. The physical inventory can then be compared to the estimated inventory. Any difference will be an estimate of shortages due to breakage, loss, or theft. At least once a year, a company should take a physical inventory to correct any errors or shortages. Gross profit method The gross profit method is used to estimate inventory for insurance purposes after a break-in, fire, or flood, or for checking the accuracy of a physical inventory count. The gross profit method uses the past gross profit rate to estimate the ending inventory as the difference between goods available for sale and cost of goods sold. It is an approximation technique that applies an estimated gross profit rate to net sales. Gross profit ratio = Sales Sales − COGS The gross profit ratio is applied to estimate the ending inventory using the following formulas: Net sale at retail X (1-gross profit ratio) = Estimated cost of goods sold Goods available for sale at cost – Estimated cost of goods sold = Estimated ending inventory at cost The gross profit rate is an average of the percentages for many products. As a result, estimated inventory represents an approximation. If prices during the current period differ from normal conditions, the gross profit method will yield less-than-accurate results. Discussion Case: Northeast Pharmaceutical When preparing financial statement of 1996, Northeast Pharmaceutical recorded RMB 21,280,000 expenses as inventory cost, which carries to next year’s beginning inventory. As a result, the bottom line is RMB 19,950,000 profits, instead of a big loss. This was discovered and was fined by CSRC as securities fraud. Required: （1） What’s the difference between expenses and inventory costs? （2） What are the impacts of inventory errors on financial statements? （3） Why Northeast Pharmaceutical chose to report false income numbers? （4） How to prevent the occurrence of such kind of cases. Summary （1） Inventory includes all goods owned by a company and held for sale. （2） Costs of merchandise inventory include all expenditures necessary to bring an item to a saleable condition and location. （3） There are four methods to assigning costs to inventory: specific identification, FIFO, LIFO and average cost. The average cost method smoothes out purchase price changes