Question

All of the following are reasons to use an estimated method of costing inventory except: A. perpetual inventory records are not maintained. B. purchase records are not maintained. C. a disaster has destroyed the inventory records and the inventory. D. interim financial statements are required but physical inventory is only taken at the end of the financial accounting period.

Answer 1

Answer:

The answer is: B) purchase records are not maintained.

Explanation:

There are two methods for estimating inventory costs:

1. Gross Profit Method : uses the information from the income statement. If operating conditions remain similar, the proportion between total sales, profits and COGS should be similar (lets say profit is 30% and COGS is 70% of total sales). You can estimate your inventory costs by using the information on total sales.  
2. Retail Method: It is used mostly by merchandising firms (retailers) that have consistent mark-ups. You have to determine the proportion between cost and retail price (lets say the COGS is 80% of the retail price). Then if you are given the retail inventory, you can determine the COGS using the proportion determined previously.