Q1) Jon Johnson the accountant with local CPA firm, has just finished inventory count for Mom & Pop's Groceries. Mom and Pop give audited financial statements to their bank annually, and part of that audit needs inventory count. Don Squire, partner with the CPA firm, has also conducted the analysis to evaluate this period's ending inventory. Don utilized gross margin method, method whereby prior period's gross margin percentage is used to infer this period's percentage, to evaluate ending inventory.Additionally, store is equipped with cash registers that scan each product as it is sold and, as a result, give a perpetual inventory record.
These three inventory analysis methods have resulted in three very different answers, that are summarized in the following table:
| Method |
Inventory Value |
| Inventory count |
$98,500 |
| Gross margin analysis |
$119,750 |
| Point-of-sale scanners |
$111,500 |
In estimating results, Jon and Don are curious as to why three methods result in such large differences. As the inventory count reports actual inventory on hand, they begin to wonder if Mom and Pop have inventory theft problem.
Question:
Write a brief memo describing why other two methods, gross margin analysis and point-of-sale scanners, can result in significantly different answers without there being theft problem.