The manager of Seaton Books Limited, a book retailer, requires an estimate of the inventory cost for a quarterly financial report to the owner on 31 March 20X5. In the past, the gross margin method was used because of the difficulty and expense of taking a physical inventory at interim dates. The company sells both fiction and nonfiction books. Due to their lower turnover rate, nonfiction books are typically marked up to produce a gross profit of 37.5%. Fiction, on the other hand, generates a 28.6% gross profit. The manager has used the average gross profit of 33.333% to estimate interim inventories. You have been asked by the manager to estimate the book inventory cost as of 31 March 20X5. The following data are available from Seaton’s accounting records:

1. Using the average gross profit margin of 33.3%, compute the estimate of inventory as of 31 March 20X5, based on the method applied to combined fiction and nonfiction books.
2. Compute the estimate of ending inventory as of 31 March 20X5, based on the gross mar-gin method applied separately to fiction and nonfiction books.
3. Which method is preferable in this situation?Explain.

  • CreatedFebruary 17, 2015
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