The Salem Company began business on January 1, 1978. The information concerning merchandise inventories, purchases, and sales for the first 3 years of operations is as follows:

a Compute the gross margin on sales (sales minus cost of goods sold) for each year, using the lower-of-cost-or-market basis in valuing inventories.
b Compute the gross margin on sales (sales minus cost of goods sold) for each year, using the acquisition-cost basis in valuing inventories.
c Indicate your conclusion whether the lower-of-cost-or-market basis of valuing inventories is "conservative" in all situations where it is applied.

Transcribed Image Text:

1978 1979 1980 Sales Purchases Inventories, Dec. 31: At cost At market $300,000 $330,000 $450,000 280,000 260,000 350,000 80,000 95,000 95,000 80,000 100,000 75,000