Final answer:
The gross profit method is used to estimate the dollar amount of inventory on hand at year-end. It involves calculating the ending inventory by using the gross profit percentage.
Step-by-step explanation:
The gross profit method is a technique used in accounting to approximate the dollar amount of inventory on hand at year-end. It is commonly used when physical inventory counts are not feasible or when a quick estimate is needed. The method calculates the inventory by using the gross profit percentage.
To calculate the estimated ending inventory using the gross profit method, you need the beginning inventory, net purchases, and the gross profit percentage. The formula is:
Ending Inventory = Beginning Inventory + Net Purchases - Cost of Goods Sold
where the Cost of Goods Sold is calculated as:
Cost of Goods Sold = Net Purchases + Beginning Inventory - Ending Inventory
By rearranging the formula, we can find the estimated ending inventory:
Ending Inventory = Net Purchases + Beginning Inventory - Cost of Goods Sold
Once you have the estimated ending inventory, you can compare it to the actual ending inventory to assess the accuracy of the estimation.