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Week 2, DQ1 - inventory for filing a claim with the...

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Week 2, DQ 1 Under what circumstances would a company need to estimate its inventory? What are the differences between using the gross profit method and retail inventory method for estimating inventory? Which method of estimation, gross profit or retail inventory, is best? Explain your answer. Inventory valuation is a means for a company to set values to inventory items. Inventory is normally the biggest current asset of businesses…proper inventory measurement is a necessity, if financial statements are to be accurate. Improper inventory measurement leads to a business’s inability to properly match revenues and expenses. Inventory might need to be estimated if a business is unable to take physical inventory, when interim financial statements are needed to be produced. Another reason why a business might have to estimate its inventory is if a company only does physical inventory once a year, and the company must estimate its inventory monthly. Additionally, if a company suffers a major loss due to a disaster (for example a fire), the company will need to estimate its
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Unformatted text preview: inventory for filing a claim with the insurance company. The gross profit method for estimated inventory uses the information from the top portion of a merchandiser’s multiple-step income statement. The gross profit method should be used when a physical inventory count is not possible. The retail method is mainly used by retailers who have their merchandise records in cost and retail selling prices. The retail method allows for an assessment of inventory at any time and produces a comparison of the estimated ending inventory against the physical ending inventory, at retail prices. The main difference between the gross profit and retail method is that the gross profit method uses historical gross profit rates and the retail method uses percentage markup from the current period. Since the gross profit method uses information from the past, the retail inventory method is best because it uses current information. Having mentioned this, the gross profit method is less reliable....
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