Certified Materials and Resource Professional Practice

The estimated gross profit rate method is not permitted for inventory valuation at the end of the year because it lacks precision and reliability. This method involves estimating the gross profit based on historical profit margins rather than tracking actual revenue and expenses related to inventory. At the end of the accounting period, businesses are required to provide accurate financial statements that reflect the true economic condition of the organization. This necessitates the use of methods that can accurately match costs of goods sold with revenues for that period.

In contrast, methods such as weighted average, retail method, and specific identification can provide more reliable and verifiable measures of inventory cost. The weighted average method smoothens out price fluctuations by averaging costs over the period, while the retail method uses a consistent mark-up to estimate inventory value based on sales prices. Specific identification allows for tracking and matching each item sold with its actual cost, which is very precise but may not be practical for businesses with large volumes of similar products. Therefore, the estimated gross profit rate method's reliance on historical and estimated figures disqualifies it for use at year-end financial reporting.