Question

The gross profit method of inventory valuation is invalid when a. A portion of the inventory is destroyed b. There is a substantial increase in inventory during the year c. There is no beginning inventory because it is the first year of operation d. Applying a blanket gross profit rate to merchandise that have wide varying rates of gross profit

Answer 1

Answer:

d. Applying a blanket gross profit rate to merchandise that have wide varying rates of gross profit

Explanation:

To know what problem could arise fro mthis method, we must understand the method:

ending inventory = cost available for sales - sales x (1- gross profit)

being cost available for sales = beginning invnetory + purchases

a) if a portion of inventory is destroyed, then we subtract it from the cost available for sales and we should be okay.

b) the amount of purchase is being considered so it will not produce a distorsion

c) then beginning invnetory equals to zero in the formula of cost availalbe and we are also okay

d) here is the problem, if there is a wide array of gross profit we could do an average but it will lead to distorsion if the sales are not in the expected weight.