The Gross Margin Method Is a Method for Estimating Inventory

question 116

Essay

The gross margin method is a method for estimating inventory based on the assumption that a constant gross margin estimated on recent sales can be used to estimate inventory values from current sales.The gross margin method is not acceptable for use in external financial statements,but can be used to test the accuracy of other cost flow assumptions.
Required:
Identify reasons that make the gross margin method unacceptable for external financial statements.

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Definitions:

Horizontal Merger

The combination of two or more firms operating in the same industry or producing similar goods or services.

Conglomerate Merger

A transaction that combines companies operating in completely unrelated business activities into a single corporation.

Vertical Merger

The merging of two or more businesses at various phases of production or distribution within the same sector.

Herfindahl Index

A measure of market concentration that sums the squares of the market shares of all firms in the market, used to assess competition levels.