Final answer:
Companies utilize the gross profit method or the retail inventory method for the cost-effective and timely estimation of their inventory, especially useful during interim reporting periods or when physical counts are not feasible. These methods aid in quick decision-making and ensure compliance with financial reporting requirements.
Step-by-step explanation:
A company might want to utilize the gross profit method or the retail inventory method for inventory valuation for several reasons. These methods are advantageous for estimating inventory in a cost-effective and timely manner, which is particularly useful when conducting interim financial statements between full physical inventory counts or when an unexpected event, such as theft or a natural disaster, has impacted the inventory, making a physical count impossible.
The gross profit method estimates cost of goods sold by applying the historical gross profit margin to current period sales, thereby approximating the end-of-period inventory. Alternatively, the retail inventory method converts retail prices to cost by applying a calculated cost-to-retail ratio. This method is often used by retailers as it helps in maintaining records directly at retail prices, simplifying the process of inventory management.
These methods also aid companies in making immediate business decisions and ensure compliance with reporting requirements, by providing preliminary inventory figures when the precise data is not readily available. Furthermore, they can be helpful in instances where companies need to assess the impact of inventory on corporate profits after tax, a crucial element for financial reporting and investment decision-making.