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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

The records of Ellen鈥檚 Boutique report the following data for the month of April. Sales revenue \(99,000 Purchases (at cost) \)48,000 Sales returns 2,000 Purchases (at sales price) 88,000 Markups 10,000 Purchase returns (at cost) 2,000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9,300 Beginning inventory (at cost) 30,000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method

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.

Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2017 \( 250,000 \) 90,000 $ 45,000 Purchases to Aug. 18, 2017 1,500,000 375,000 160,000 Sales revenue to Aug. 18, 2017 2,080,000 533,000 210,000 Exercises 479 480 Chapter 9 Inventories: Additional Valuation Issues Instructions Submit your estimate of the inventory amounts immediately preceding the fire.

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?

Keyser鈥檚 Fleece Inc. holds a drove of sheep. Keyser shears the sheep on a semiannual basis and then sells the harvested wool into the specialty knitting market. Keyser has the following information related to the shearing sheep at January 1, 2017, and during the first six months of 2017. Shearing Sheep Carrying value (equal to net realizable value), January 1, 2017 $74,000 Change in fair value due to growth and price changes 4,700 Change in fair value due to harvest (575) Wool harvested during the fi rst 6 months (at NRV) 9,000 Prepare the journal entry(ies) for Keyser鈥檚 biological asset (shearing sheep) for the first six months of 2017
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