The Gross Profit Method Of Estimating Inventory is a business tool used by companies to determine the value of their on-hand inventory. In essence, it’s an accounting method that helps you to estimate your ending inventory balance and cost of goods sold. How? By factoring in the historical gross profit ratio (calculated as net sales minus cost of goods sold / net sales) and the current period’s beginning inventory balance. This will give you a figure for the estimated ending inventory balance and the cost of goods sold can then be calculated. With this information in hand, it’s easier to make better informed decisions about how much inventory to keep on hand and how to maximize profits.