Final Answer:
The gross profit method estimates the cost of ending inventory by applying 4) Gross profit ratio to cost of goods sold.
Step-by-step explanation:
The gross profit method is a technique used to estimate the cost of ending inventory, and it involves applying the gross profit ratio to the cost of goods sold (COGS). The gross profit ratio is calculated as follows:
Gross Profit Ratio
=
Gross Profit
Net Sales
×
100
Gross Profit Ratio=
Net Sales
Gross Profit
×100
Where:
Gross Profit
=
Net Sales
−
COGS
Gross Profit=Net Sales−COGS
In the context of the gross profit method, the formula is rearranged to solve for COGS:
COGS
=
Net Sales
−
(
Gross Profit Ratio
×
Net Sales
)
100
COGS=
100
Net Sales−(Gross Profit Ratio×Net Sales)
So, the gross profit method estimates the cost of ending inventory by applying the gross profit ratio to the COGS, which is reflected in option 4. This approach assumes a consistent relationship between sales and cost of goods sold, making it a practical method for approximating ending inventory in situations where a detailed physical count is not feasible, such as interim financial reporting or in the aftermath of events like natural disasters.
In summary, the gross profit method offers a simplified yet reliable way to estimate ending inventory, providing valuable insights for financial reporting and decision-making processes.