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Sir i don’t understand how increase in Gross profit margin could be caused by overstatement of revenue?
i am muddled because my study text states that GPM will increase because of overstatement of revenue.
my point is if revenue is overstated then so will the gross profit, both of which should negate each other leading to a constant GPM.
I suggest using some simple numbers to illustrate:
Say revenue should be 120, cost of sales is 100, so GP is 20 i.e. GP% is 20%.
Say revenue is overstated at 130 ………. GP% is 30%.I am confused by this. I thought Gross Profit was GP/revenue so 16.67% or 23.08%
@brucen – you are quite correct – but the argument remains the same whether you consider markup on cost of sales (my calculation) or margin on revenue (your calculation) – if revenue is overstated, the % change in profit (however measured) will be overstated (because cost of sales is unchanged). Hope that makes sense.
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