Question

Which statement is true about the gross profit method of inventory valuation?

a. It may be used to estimate inventories for annual statements.
b. It may be used to estimate inventories for interim statements.
c. It eliminates the need for physical inventories.
d. When calculated on selling price, it will always be more than the related percentage based on cost.

Answer 1

b. It may be used to estimate inventories for interim statements.

Step-by-step explanation:

As we know that

Gross profit = Sales - the cost of goods sold

By doing the inventory valuation through the gross profit method, it estimated inventories for interim statements as these statements are covering the financial information that is less than a year so that the proper analysis could be made and in this, no auditing is required.

Therefore, for interim statements, the gross profit method is required.