   # Explain why a company might want to utilize the gross profit method or the retail inventory method for inventory valuation. FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

#### Solutions

Chapter
Section FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 10, Problem 6Q
Textbook Problem
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## Explain why a company might want to utilize the gross profit method or the retail inventory method for inventory valuation.

To determine

Concept introduction:

Gross Profit method:

Gross Profit method is defined as a method that is used to measure the value of closing inventory and the cost of goods sold. Under this method a gross profit ratio is used to calculate the estimated cost of the inventory. Following formulas are used to derive the cost of ending inventory:

The formula for gross profit ratio is as follows:

Gross Profit = Gross ProfitSales

The formula to calculate the Cost of goods sold is as follows:

Cost of goods sold = Net Sales – Gross profit

The formula to calculate the ending inventory is as follows:

Cost of Ending inventory = Beginning inventory at cost + Cost of goods purchased – Cost of goods sold

To indicate:

the reasons for using the gross profit method or retail inventory method for inventory valuation.

### Explanation of Solution

Gross Profit method is used to estimate the value of ending inventory and cost of goods sold. Under this method a gross profit ratio is used to calculate the estimated cost of the inventory...

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