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The following is a completeness test of inventory in BPP AA Workbook page 290:
“Compare the gross profit percentage to the previous year or industry data and investigate any unexpected variations.”
I do not understand the relationship between gross profit percentage and Completeness of inventory. What is the rationale behind this?It’s good that you have asked because you definitely need to understand this – there could easily be an OT question which says that GP% has gone up (or down) and which of the options could validly explain the change.
GP% = Profit/Revenue x100
Profit = Revenue – cost of goods soldTherefore GP% will be overstated/increase is revenue is overstated/increased or cogs is understated/decreased.
Now you have to remember that cogs = opening inventory + purchases – closing inventory
Cogs will be overstated (and GP% understated) if closing inventory is understated – i.e. incomplete.
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