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Chapter 9: Q11Q (page 474)

Question:What are the major uses of the gross profit method?

Short Answer

Expert verified

The major uses of the gross profit method are as follows:

  • Helps in the valuation of ending inventory
  • Periodic physical counts are not required
  • Helps in ascertaining the damages in the inventory

Step by step solution

01

Step-by-step-solutionStep1:

The gross profit method values the inventory by considering the gross profit percentage. This method is used by the auditor in the situation when the estimated value of inventory is required. Also in the situation of fire or theft of financial records, this method is used.

02

Step 2:

The uses of gross profit include:

  • Auditors use this method to value the inventory, to check the accuracy of physical inventories available in the business.
  • It helps in ascertaining the value of the ending inventory, hence there is no need to estimate the inventories physically on a periodic basis.
  • In the situation of damage by fire or any other accident, it helps in ascertaining the value of damages related to the inventories.

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Most popular questions from this chapter

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was \(38,000. Purchases since January 1 were \)72,000; freight-in, \(3,400; purchase returns and allowances, \)2,400. Sales are made at 331 /3% above cost and totaled \(100,000 to March 9. Goods costing \)10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331 /3% of sales.

Presented below is information related to Rembrandt Inc.鈥檚 inventory. (per unit) Skis Boots Parkas Historical cost \(190.00 \)106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to sell 19.00 8.00 2.50 Cost to complete 32.00 29.00 21.25 Determine the following: (a) the net realizable value for each item, and (b) the carrying value of each item under LCN

Deere and Company reported inventory in its balance sheet as follows. Inventories $1,999,100,000 What additional disclosures might be necessary to present the inventory fairly?

Kumar Inc. uses LIFO inventory costing. At January 1, 2017, inventory was \(214,000 at both cost and market value. At December 31, 2017, the inventory was \)286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.

A fire destroys all of the merchandise of Assante Company on February 10, 2017. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2017 $ 400,000 Sales revenue to February 10, 2017 1,950,000 Purchases to February 10, 2017 1,140,000 Freight-in to February 10, 2017 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2017?
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