Final answer:
The statement is true; the gross profit method estimates inventory and cost of goods sold using a gross profit percentage from historical data applied to current sales.
Step-by-step explanation:
The statement that the gross profit method uses the current period's gross profit percentage in determining the mark-up is True. The gross profit method is a way to estimate inventory and cost of goods sold. It relies on historical data to determine a gross profit percentage, which is then applied to the current period's sales to estimate the cost of goods sold. The formula for the gross profit method is:Beginning Inventory + Purchases - End Inventory = Cost of Goods Sold (estimated)Net Sales - Cost of Goods Sold (estimated) = Gross Profit (estimated)
By using the gross profit ratio from past records, a business is able to mark up its costs to arrive at the sales figure for financial reporting purposes.The given statement is False. The gross profit method actually uses the previous period's gross profit percentage to determine the mark-up. This method is commonly used in business to estimate the value of inventory when actual counts are not available. The formula for calculating the cost of goods sold using the gross profit method is:Cost of Goods Sold = Sales - Gross ProfitFor example, if a company's sales in the current period are $10,000 and the previous period's gross profit percentage was 40%, then the cost of goods sold would be $6,000 (10,000 - (10,000 x 0.40)).