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.

Question

Business

Lou

20 January, 11:30

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.

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Answers (1)

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Hailie Sharp · Answer 1

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

Explanation:

There are two methods for estimating inventory costs:

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. 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.