When a physical inventory count is not possible or cost effective, an estimate of inventory may...
When a physical inventory count is not possible or cost effective, an estimate of inventory may be made. When might the gross profit method of estimating inventory be used?
When inventory can be salvaged for sale after a hurricane.
When inventory is destroyed by fire or other catastrophe.
When the proceeds from insurance coverage of inventory have been received.
When inventory has a consistent mark-up.
Homework Answers
Answer - When inventory is destroyed by fire or other catastrophe
When inventory is destroyed by fire or catastrophe gross profit method of estimating inventory can be used. The gross profit method takes gross profit of previous year into consideration to see the goods lost by fire and inventory in closing stock. It is helpful in claims with insurance company. It calculates ending inventory by deducting gross profit from sales which gives cost of goods sold. From cost of goods sold opening stock and purchases deducted to arrive at closing stock. Hence the answer is when inventory is destroyed by fire or other catastrophe.
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