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which of the following will make GP ratio fall
1. closing inventory is lower than opening inventory
2. some items in closing inventory are included at less than costin my supreme logic i chose 1 because:
cost of sales = purchases + opening – closing
so if closing < opening, this means a high cogs, which means gp is reduced.
but the answer is 2.
in #2, under value wd be pretty much the same as #1 no?
If inventory is being consistently value at lower of cost and nrv, the absolute levels of inventory will have no affect on the cost of sales
But if inventory is being marked down, cost of sales is no longer merely cost of the goods sold – it’s now cost of the goods sold PLUS the amount by which closing inventory has been reduced to arrive at net realisable value
That represents an unusually high cost of sales which therefore gives rise to a fall in gross profit percentage
OK?
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