1. It is based on the assumption that the
The gross profit method assumes that
rate of gross profit remains approximately
the same from period to period and
therefore the ratio of cost of goods sold to
net sales is relatively constant from period
to period.
a. Retail inventory method
b. Cost of goods sold
c. Gross profit method
d. Net sales
2. Which statement is not valid about the
gross profit method?
a. It may be used by auditors.
b. It is an acceptable accounting procedure.
c. It may be used to estimate inventory for
annual statements.
d. It may be used to estimate inventory for
interim statements
3. The gross profit method of estimating
inventory would not be useful when
a. There is a significant change in the mix of
products being sold.
b. The relationship between gross profit and
sales remains stable over time.
c. A periodic system is in use and
inventories are required for interim
statements.
d. Inventories have been destroyed or lost
by fire, theft or other casualty, and the
specific data required for inventory valuation
are not available.
4. How is the gross profit method used in
relation to inventory valuation?
a. To provide a FIFO inventory value
b. To estimate the cost of goods sold
c. To verify the accuracy of the physical
inventory
d. To verify the accuracy of the perpetual
inventory record
5.
a. The amount of gross profit is the same as
in prior years.
b. Inventory values have not increased from
previous years.
c. Sales and cost of goods sold have not
changed from previous years.
d. The relationship between selling price
and cost of goods sold is similar to prior
years.
6. The gross profit method of inventory
valuation is invalid when
a. A portion of inventory is destroyed.
b. There is a substantial increase in
inventory during the year.
c. There is no beginning inventory because
it is the first year of operation.
d. The gross profit percentage applicable to
the goods in ending inventory is different
from the percentage applicable to goods
sold during the period.
7. The gross profit method of estimating
inventory would not be useful when
a. A periodic system is in use and
inventories are required for interim
statements.
b. Inventories have been destroyed or lost
by fire, theft, or other casualty, and the
specific data required for inventory valuation
are not available.
c. There is a significant change in the mix of
the products being sold.
d. There is significant unmonitored change
in the relationship between gross profit and
the selling price of goods being sold
8. If the gross profit rate is based on sales,
the cost of goods sold is computed as
a. Gross sales divided by sales ratio
b. Gross sales times cost ratio
c. Net sales divided by sales ratio
d. Net sales times cost ratio
9. The gross margin method of estimating 13. Two accepted procedures for
ending inventory may be used for all of the approximating the value of inventory
following, except a. Lower of cost and Net realizable value
a. Internal as well as external interim reports b. Gross profit method and Retail inventory
b. Internal as well as external year-end method
reports c. Note receivable and Loan receivable
c. Estimate of inventory destroyed by fire or d. None of the above
other casualty
14. Reason for estimating the cost of goods
d. Rough test of the validity of an inventory
on hand
cost determined under either periodic or
a. Inventory is destroyed by catastrophes
perpetual system.
b. Prove correctness of physical count of
10. The gross profit method of inventory goods
valuation is not valid when c. Preparation of interim financial
a. All ending inventory is destroyed by fire statements
before it can be counted d. all of the above
b. The gross margin percentage changes
significantly during the year
c. There is substantial increase in the cost
of inventory during the year
d. There is substantial increase in the
quantity of inventory during the year
11. Which of the following is not a basic
assumption of the gross profit method?
a. The beginning inventory plus the
purchases equal total goods to be
accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are
deducted from the sum of the opening
inventory plus purchases, the result is the
amount of inventory on hand.
d. The total amount of purchases and the
total amount of sales remain relatively
unchanged from the comparable previous
period.
12. If the gross profit rate is based on sales,
the cost of goods sold is computed as
a. Net sales times cost ratio
b. Net sales divided by sales ratio
c. Gross sales times cost ratio
d. Gross sales divided by sales ratio
15. On October 31, 2024, Zeus Company
reported that a flood caused severe damage
to the entire inventory. Based on recent
history, the entity has a gross profit of 40%
of sales. The following information is
available from the records for ten months
ended October 31, 2024.
Inventory, January .......................... 550,000
Purchases ................................... 3,150,000
Purchase returns ............................ 50,000
Sales ........................................... 6,200,000
Sales return .................................... 600,000
Sales allowances ........................... 130,000
A physical inventory disclosed usable
damaged goods which can be sold for
P85,000.
Using the gross profit method, what is the
estimated cost of goods sold for the ten
months ended October 31, 2024?
a. 3,360,000
b. 3,830,000
c. 3,900,000
d. 3,825,000
Solution:
Sales ……………...….…….. 6,200,000
Sales returns ……………….. ( 600,000)
Net sales
……………………………….. 5,600,000
Cost of goods sold ……....... 3,360,000
(60% x 5,600,000)
Hera Company sells merchandise at a
gross profit of 20%. On May 31, 2024, all of
the inventory was destroyed by fire. The
following figures pertain to the operations
for the five months ended May 31, 2024:
Net sales ..................................... 5,000,000
Beginning inventory .................... 4,000,000
Net purchases ............................. 2,800,000
What is the estimated cost of the destroyed
inventory?
a. 4,800,000
b. 2,800,000
c. 1,600,000
d. 800,000
Solution:
Beginning inventory ............... 4,000,000
Net purchases ....................... 2,800,000
Goods available for sale ........ 6,800,000
Less: Cost of sales .............(4,000,0000)
(5,000,000 x 80%)
Ending inventory .................... 2,800,000
destroyed by fire
In the absence of any contrary
statement, the gross profit rate is based
on sales. Thus, if the gross profit rate is
20% on sales, the cost ratio is 80%
Poseidon Company estimated the cost of
the physical inventory on March 31 for use
in interim financial statement. The rate of
markup on cost is 50%. The inventory on
January 1 was P3,700,000. During the
period January 1 to March 31, the entity had
purchases of P3,400,00, purchase returns
of P300,000 and sales of P6,000,000.
What is the estimated cost of inventory on
March 31?
a. 2,100,000
b. 3,600,000
c. 3,975,000
d. 2,800,000
Solution:
Goods available for sale ........ 6,800,000
(3,700,000 + 3,400,000 - 300,000)
Cost of goods sold .............. (4,000,000)
(6,000,000 / 150%)
Inventory - March 31.............. 2,800,000
Apollo Company began operations in 2024.
For the year ended December 31, 2024, the
entity provided the following information:
Total merchandise purchases for the
year ........................ 8,000,000
Merchandise inventory on December
3 ........................ 1,600,000
Collection from customers
….......................... 3,000,000
All merchandise was marked to sell at 25%
above cost. All sales are on a credit basis
and all receivables are collectible.
What is the balance of accounts receivable
on December 31, 2024?
a. 1,000,000
b. 3,840,000
c. 5,000,000
d. 5,800,000
Solution:
Purchases ............................. 8,000,000
Inventory - December 31 .... (1,600,000)
Cost of goods sold ................. 6,400,000
Markup on cost ...................... 1,600,000
(25% x 6,400,000)
Sales ..................................... 8,000,000
(125% x 6,400,000)
Collections from customers...(3,000,000)
Accounts receivable .............. 5,000,000
Artemis Company sells merchandise on a
consignment basis to dealers. The selling
price of the merchandise averages 75%
above cost. The dealer is paid a 10%
commission of the sales price for all sales
made. All dealer sales are made on a cash
basis. The following consignment activities
occurred during the current year:

Manufacturing cost of goods shipped on

consignment ................... 6,600,000
Sales price of merchandise sold by
dealers ..........................................5,600,00
0
Payments remitted by dealers after
deducting commission ..... 1,500,000

What is the gross profit on sales?

a. 1,220,000
b. 1,700,000
c. 1,920,000
d. 2,400,000

Solution
Sales .................................. 5,600,000
Cost of sales....................... 3,200,000
(5,600,000/175%)
Gross profit.......................... 2,400,000