Question

Which of the following is not an assumption made when using the gross profit method?

A) The beginning inventory plus purchases equal total goods to be accounted for.

B) The cost ratio is computed after markups (and markup cancellations) but before markdowns.

C) Goods not sold must be on hand.

D) Sales, reduced to cost, deducted from the sum of the opening inventory plus purchases equals ending inventory.

Answer 1

The gross profit method does not assume that sales, reduced to cost, deducted from the opening inventory plus purchases equals ending inventory.The correct answer is option D.

Step-by-step explanation:

The correct answer is D) Sales, reduced to cost, deducted from the sum of the opening inventory plus purchases equals ending inventory.

In the gross profit method, the assumption made is that the beginning inventory plus purchases should equal the total goods to be accounted for. This is option A.

The cost ratio is computed after markups (and markup cancellations) but before markdowns. This assumption is option B.

Goods not sold must be on hand. This is an assumption of the gross profit method and is option C.

However, option D is not an assumption made when using the gross profit method. The gross profit method allows for the estimation of closing stock by deducting the cost of goods sold (reduced to cost) from the sum of the opening inventory plus purchases.

The difference would give the estimate of the ending inventory. So, this assumption is not necessary in the gross profit method.The correct answer is option D.