Intermediate-Accounting Handout Chap 13
Intermediate-Accounting Handout Chap 13
The most common reasons for making an estimate of the cost of goods on hand are:
a. The inventory is destroyed by fire and other catastrophe, or theft of the merchandise has occurred and
the amount of inventory is required for insurance purposes
b. A physical count of the goods in hand is made and it is necessary to prove the correctness or
reasonableness of such count by making an estimate. This is known as the gross profit test in the
accounting parlance
c. Interim financial statements are prepared and a physical count of the goods on hand is not necessary
because it may take time to do the same. Moreover, only an estimate is required to fairly present the
financial position and financial performance of the entity for interim reporting purposes
Beginning inventory xx
Purchases xx
Add: Freight-in xx
Total xx
Less: Purchase return, allowance & disc xx xx
Goods available for sale xx