1. It is based on the assumption that the 5.

The gross profit method assumes that

rate of gross profit remains approximately a. The amount of gross profit is the same as
the same from period to period and in prior years.
therefore the ratio of cost of goods sold to b. Inventory values have not increased from
net sales is relatively constant from period previous years.
to period. c. Sales and cost of goods sold have not
a. Retail inventory method changed from previous years.
b. Cost of goods sold d. The relationship between selling price
c. Gross profit method and cost of goods sold is similar to prior
d. Net sales years.
2. Which statement is not valid about the 6. The gross profit method of inventory
gross profit method? valuation is invalid when
a. It may be used by auditors. a. A portion of inventory is destroyed.
b. It is an acceptable accounting procedure. b. There is a substantial increase in
c. It may be used to estimate inventory for inventory during the year.
annual statements. c. There is no beginning inventory because
d. It may be used to estimate inventory for it is the first year of operation.
interim statements d. The gross profit percentage applicable to
the goods in ending inventory is different
3. The gross profit method of estimating
from the percentage applicable to goods
inventory would not be useful when
sold during the period.
a. There is a significant change in the mix of
products being sold. 7. The gross profit method of estimating
b. The relationship between gross profit and inventory would not be useful when
sales remains stable over time. a. A periodic system is in use and
c. A periodic system is in use and inventories are required for interim
inventories are required for interim statements.
statements. b. Inventories have been destroyed or lost
d. Inventories have been destroyed or lost by fire, theft, or other casualty, and the
by fire, theft or other casualty, and the specific data required for inventory valuation
specific data required for inventory valuation are not available.
are not available. c. There is a significant change in the mix of
the products being sold.
4. How is the gross profit method used in
d. There is significant unmonitored change
relation to inventory valuation?
in the relationship between gross profit and
a. To provide a FIFO inventory value
the selling price of goods being sold
b. To estimate the cost of goods sold
c. To verify the accuracy of the physical 8. If the gross profit rate is based on sales,
inventory the cost of goods sold is computed as
d. To verify the accuracy of the perpetual a. Gross sales divided by sales ratio
inventory record 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 Hera Company sells merchandise at a
reported that a flood caused severe damage gross profit of 20%. On May 31, 2024, all of
to the entire inventory. Based on recent the inventory was destroyed by fire. The
history, the entity has a gross profit of 40% following figures pertain to the operations
of sales. The following information is for the five months ended May 31, 2024:
available from the records for ten months
ended October 31, 2024. Net sales ..................................... 5,000,000
Beginning inventory .................... 4,000,000
Inventory, January .......................... 550,000 Net purchases ............................. 2,800,000
Purchases ................................... 3,150,000
Purchase returns ............................ 50,000 What is the estimated cost of the destroyed
Sales ........................................... 6,200,000 inventory?
Sales return .................................... 600,000
Sales allowances ........................... 130,000 a. 4,800,000
b. 2,800,000
A physical inventory disclosed usable c. 1,600,000
damaged goods which can be sold for d. 800,000
P85,000.
Solution:
Using the gross profit method, what is the Beginning inventory ............... 4,000,000
estimated cost of goods sold for the ten Net purchases ....................... 2,800,000
months ended October 31, 2024? Goods available for sale ........ 6,800,000
Less: Cost of sales .............(4,000,0000)
a. 3,360,000 (5,000,000 x 80%)
b. 3,830,000 Ending inventory .................... 2,800,000
c. 3,900,000 destroyed by fire
d. 3,825,000 In the absence of any contrary
statement, the gross profit rate is based
Solution:
on sales. Thus, if the gross profit rate is
Sales ……………...….…….. 6,200,000
20% on sales, the cost ratio is 80%
Sales returns ……………….. ( 600,000)
Net sales
……………………………….. 5,600,000
Cost of goods sold ……....... 3,360,000
(60% x 5,600,000)
Poseidon Company estimated the cost of Apollo Company began operations in 2024.
the physical inventory on March 31 for use For the year ended December 31, 2024, the
in interim financial statement. The rate of entity provided the following information:
markup on cost is 50%. The inventory on
January 1 was P3,700,000. During the Total merchandise purchases for the
period January 1 to March 31, the entity had year ........................ 8,000,000
purchases of P3,400,00, purchase returns Merchandise inventory on December
of P300,000 and sales of P6,000,000. 3 ........................ 1,600,000
Collection from customers
What is the estimated cost of inventory on ….......................... 3,000,000
March 31?
All merchandise was marked to sell at 25%
a. 2,100,000 above cost. All sales are on a credit basis
b. 3,600,000 and all receivables are collectible.
c. 3,975,000
d. 2,800,000 What is the balance of accounts receivable
on December 31, 2024?
Solution:
Goods available for sale ........ 6,800,000 a. 1,000,000
(3,700,000 + 3,400,000 - 300,000) b. 3,840,000
Cost of goods sold .............. (4,000,000) c. 5,000,000
(6,000,000 / 150%) d. 5,800,000
Inventory - March 31.............. 2,800,000
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