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A company changed it,s inventory valuation from FIFO to AVCO which was accounted for retrospectively as it was a change of accounting policy and the overall net decrease in inventory value(closing-opening)was $400000.So when inventory is decreased means less costs of sale should be charged against revenue which will result in more gross profit.But kaplan solution says “decrease in profit of $400,000” .How is that possible?
Opening inventory (say) $2,000,000
Purchases, say $20,000,000Subtotal $22,000,000
Less closing inventory, say $2,500,000
Cost of sales $19,500,000
Now change that closing inventory figure by $400,000
Opening inventory (say) $2,000,000
Purchases, say $20,000,000Subtotal $22,000,000
Less closing inventory, say $2,100,000
Cost of sales $19,900,000
Cost of sales has increased by $400,000 and therefore profits have decreased by that same amount
OK?
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