Practice prompt · Q:inventory-ownership-cost-flow-and-measurement/estimation-method-assumptions-001

Name what each estimation method assumes

Tests whether the learner states the assumption that replaces the physical count in each estimation method.

Updated Aug 18, 2026 Review due Nov 18, 2026

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The assumption is the whole risk. A company whose product mix shifted toward lower-margin goods will overstate ending inventory under the gross profit method, and nothing in the arithmetic will say so.

Choose the best answer. a The gross profit method assumes the historical margin still holds; the retail method assumes the cost-to-retail ratio of the goods sold matches that of the goods left. b Both methods assume prices did not change during the period. c The gross profit method assumes a first-in first-out cost flow and the retail method assumes last-in first-out. d Both produce a figure that may substitute for a physical count in the annual financial statements.

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Answer: a

Choice a. Both replace the count with an assumed relationship, and each is only as good as that relationship.