Q11Q - Intermediate Accounting (Kieso)

Question

Question: What are the major uses of the gross profit method?

Step-by-Step Solution

Answer

The major uses of the gross profit method are as follows:

• Helps in the valuation of ending inventory
• Periodic physical counts are not required
• Helps in ascertaining the damages in the inventory

Step-by-step-solution Step1:

The gross profit method values the inventory by considering the gross profit percentage. This method is used by the auditor in the situation when the estimated value of inventory is required. Also in the situation of fire or theft of financial records, this method is used.

Step 2:

The uses of gross profit include: 

• Auditors use this method to value the inventory, to check the accuracy of physical inventories available in the business. 
• It helps in ascertaining the value of the ending inventory, hence there is no need to estimate the inventories physically on a periodic basis. 
• In the situation of damage by fire or any other accident, it helps in ascertaining the value of damages related to the inventories.