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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 6-3 Estimating the Inventory Gross profit method of estimating inventory Retail method of estimating inventory Calculating merchandise inventory turnover ratio Calculating average number of days’ sales in merchandise inventory

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 6 Objectives Inventory Planning and Valuation After studying Chapter 6, you will be able to: Define accounting terms related to planning and costing inventory. Identify accounting concepts and practices related to planning, counting, and costing inventory. Describe the nature of merchandise inventory. Determine the cost of merchandise inventory using selected costing methods. Estimate the cost of merchandise inventory using selected estimating methods. Calculate merchandise inventory turnover ratio and average number of days’ sales in merchandise inventory. 2 LESSON 6-3

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 6-3 retail method of estimating inventory: estimating inventory by using a percentage based on both cost and retail prices merchandise inventory turnover ratio: the number of times the average amount of merchandise inventory is sold during a specific period of time average number of days’ sales in merchandise inventory: the period of time needed to sell an average amount of merchandise inventory 3 LESSON 6-3

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 4 LESSON 6-3 1.Write beginning inventory amount. 2.Determine net purchases. 7.Determine estimated ending inventory. 6.Calculate estimated cost of merchandise sold. 5.Estimate gross profit. 4.Enter net sales. 3.Calculate merchandise available for sale. GROSS PROFIT METHOD OF ESTIMATING INVENTORY page 182 5 6 7 4 1 2 3

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 6-3 1.Enter beginning inventory at cost and retail. 2.Add net purchases at cost and retail. 6.Determine estimated ending inventory cost. 5.Calculate estimated ending inventory at retail. 4.Write net sales. 3.Calculate merchandise available for sale at cost and retail. RETAIL METHOD OF ESTIMATING INVENTORY page 183 6 3 1 2 5 4

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 6-3 Average Merchandise Inventory =2÷ December 31 Merchandise Inventory + January 1 Merchandise Inventory $925,368.00+$170,845.00=5.4 times Cost of Merchandise Sold + Average Merchandise Inventory = Merchandise Inventory Turnover Ratio MERCHANDISE INVENTORY TURNOVER ($168,365.00+$173,325.00)÷2=$170,845.00 page 184

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 6-3 AVERAGE NUMBER OF DAYS’ SALES IN MERCHANDISE INVENTORY Average Number of Days’ Sales in Merchandise Inventory = Merchandise Inventory Turnover Ratio ÷Days in Year 365÷5.4=68 days page 184

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Technology For Business on page 185 Spreadsheet Activity – Valuation of Inventory 8 LESSON 6-3

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 9 LESSON 6-4 DEFINE TERMS REVIEW In Quizlet retail method of estimating inventory merchandise inventory turnover ratio average number of days’ sales in merchandise inventory page 185 Edit this set: Chapter 6 AdvAcc (then SAVE)

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Exit Ticket for today: Audit Your Understanding 6-3 1.On what assumptions is the gross profit method of estimating inventory based? 2.To use the retail method of estimating inventory, what records must be kept? 3.Explain a merchandise inventory turnover ratio of 5.0. 4.How is the average number of days’ sales in merchandise inventory calculated? 10 LESSON 6-3 In a Word Document, SaveAS: Chapter6-3AYUYourName And drop in my Inbox today!

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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Complete the following assignments for Chapter 6-3 today Define Terms Review on page 186. Answer Audit Your Understanding questions on page 186. Complete Work Together 6-3 on Aplia – page 186. Complete On Your Own 6-3 on Aplia – page 186. Complete Application Problem 6-3 on Aplia – page 189. Complete Application Problem 6-4 on Aplia – page 190. 11 LESSON 6-3

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