Question

Provide at least one example of when the gross profit method would be useful. Explain the rationale for selecting the example provided.

Answer 1

The gross profit method is a technique for estimating the amount of ending inventory.

gross profit method might be used to estimate each month ending inventory or it might be used as a part of calculation to determine the approximate amount of inventory that has been lost due to theft fire or other reasons.

the gross profit method of estimating ending inventory assume that the gross profit percentage of the gross margin ratio is known.

Example for gross profit method

All amounts are in $,dollars

Assume you need to estimate the cost of companies July 31st inventory. The last time the inventory was calculated for seven months earlier on December 31st when it had a cost of 15000. since December 31st the company purchased goods having a cost of 40000, it sales was 50000 and the gross profit percentage has remained at 20%(hence its cost of goods sold would be 80% of the sales).

The inventory at the end of day on July 31st is estimated as follows :-

A. Inventory cost at December 31st was 15000

B.Purchases between December 31st and July 31st had a cost of 42000

C. cost of goods available = 57000(15000+42000)

D. Cost of goods sold = sales of 50000 ×80% = 40000

E. Ending inventory at July 31 as its estimated cost :- 17000(57000 cost of goods available minus 40000of cost of goods sold).

These are all the explanation and example required to solve the question.

I hope, all the above given informations and calculations are useful and helpful to you.

Thank you.