The gross profit method of inventory valuation is not valid when
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INSTRUCTIONS: On the accompanying answer sheet, blacken the box which correspond to the correct letter choice. Blacken only one box per item. 1.The gross profit method of estimating ending inventory may be used for all of the following, except: A.internal as well as external interim reporting. B.internal as well as external year-end reports. C.estimate of inventory destroyed by fire or other casualty. D.Rough test of the validity of an inventory cost determined under either periodic or perpetual inventory system. 2.The gross profit method assumes that: A.the amount of gross profit is the same as in prior years. B.sales and cost of goods sold have not changed from previous years. C.inventory values have not increased from previous years. D.the relationship between the selling price and cost of goods sold is similar to prior years. 3.The gross profit method of estimating inventory would not be useful when: A.a periodic inventory system is in use and inventories are required for interim reports. B.inventories have been destroyed or lost by fire, theft or other casualty, and the specific data required for inventory valuation are not available. C.there is a significant change in the mix of products being sold. D.the relationship between the gross profit and sales remains stable over time. 4.The gross profit method of inventory valuation is not valid when: A.there is substantial increase in the quantity of inventory during the year. B.there is substantial increase in the cost of inventory during the year. C.the gross profit percentage changes significantly during the year. D.all ending inventor is destroyed by fire before it can be counted. 5.Which would not require an estimated of inventory? A.Inventory destroyed by typhoon. B.Proof of the reasonable accuracy of the physical count. C.Interim financial statements are prepared. D.Determination of the ending inventory to be reported in the statements of financial position at year-end. 6.If the gross profit rate is based on cost, the cost of goods sold is computed as: A.Net sales times cost ratio.C. Gross sales times cost ratio. B.Net sales divided by sales ratio.D. Gross sales divided by sales ratio. 7.An advantage of the retail inventory method is that it: A.Permits entities to avoid taking an annual physical inventory count. B.Gives a more accurate measurement of inventory. C.Hides costs from customers and employees. D.Provides a method for inventory control and facilities determination of the periodic inventory. 8.To produce an inventory valuation which approximates the lower of cost and NRV using the retail inventory method, the computation of the ratio of cost to retail should: A.Include markups but not markdowns. B.Include markups and markdowns. C.Ignore both markups and markdowns. D.include markdowns but not markups. 9.When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of cost to retail ratio because: A.There may be no markdowns during the year. B.This rends to give a better approximation of the lower of average cost and net realizable value. C.Markups are also ignored. D.This tend to result in the showing of a normal profit margin in a period when no markdowns goods have been sold. 10.The conventional retail inventory method produces an ending inventory that approximates: A.Lower of average cost and net realizable value. B.Lower of FIFO cost and net realizable value. C.Lower of LIFO cost and net realizable value. D.Lower of cost and net realizable value. What is the gross profit method of inventory?The gross profit method estimates the value of inventory by applying the company's historical gross profit percentage to current‐period information about net sales and the cost of goods available for sale. Gross profit equals net sales minus the cost of goods sold.
Why is the gross profit method not appropriate for annual reports?As outlined earlier, the gross profit method is not appropriate for annual reports because it only estimates what the ending inventory balance may be and is not conclusive.
Can gross profit method be used by auditors?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.
Which statement is true about the gross profit method of inventory valuation?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.
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