BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The amount of gross profit is the same as in prior years.
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Sales and cost of goods sold have not changed from previous years.
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Inventory values have not increased from previous years.
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The relationship between gross profit and sales remains stable over time.
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Detailed explanation-1: -The gross profit (or gross margin) method uses the previous year’s average gross profit margin (i.e. sales minus cost of goods sold divided by sales) to calculate the value of the inventory. Keep in mind the gross profit method assumes that gross profit ratio remains stable during the period.
Detailed explanation-2: -Which statement is true about the gross profit method of inventory valuation? When calculated on selling price, it will always be more than the related percentage based on cost.
Detailed explanation-3: -The gross profit method is not an acceptable method for determining the year-end inventory balance, since it only estimates what the ending inventory balance may be. It is not sufficiently precise to be reliable for audited financial statements.
Detailed explanation-4: -Gross profit method: Uses the expected gross profit percentage of total sales to find the cost of goods sold. Retail method : Uses the cost-to-retail percentage of total sales to find the cost of goods sold.
Detailed explanation-5: -The gross profit method is used to estimate inventory at the end of the time period. It can’t be used if the figures for beginning inventory, purchases made since, total sales during the period and the gross profit margin are unavailable.