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According to BPP book, “Higher inventories reduce the cost of sales and increase reported profits”.
Could you pls clarify more on this. Thank you
Hi, Higher Closing Inventory leads to lower COS and hence more G.P.
usually we find out about closing inventory at the end of year (as the name suggests), hence the amount of closing inventory might increase from then previous thought, due to which the CoS decreases as the formula for CoS = Opening Inventory+Purchases-Closing Inventory. When we subtract Cost of Sales with Sales Revenue we get Gross Profit, if our CoS is lower than of couse G.P will be higher.Also sometimes Closing Inventory is higer or vice versa due to the method or technique used to measure Inventories (FIFO results in higher Closing Inventory, AVCO results in lower closing inventory as compared to FIFO)
Hope this clears.
Silverocean: If you are wanting me to answer then you should ask in the Ask the Tutor Forum.
What tasbihak has written is correct. You should know from Paper FA (was F3) or whatever exempted you, that the cost of sales = opening inventory + purchases – closing inventory, and therefore higher closing inventories means lower cost of sale and therefore higher profits.
Do not worry about FIFO and AVCO – they are not examinable in Paper PM.
I would imagine that the statement you quoted from BPP is probably in the section on absorption and marginal costing, because under absorption costing inventories are valued higher because fixed production overheads are included.
However, this is unlikely to be relevant for Paper PM – in theory it could be asked because it is revision from Paper MA (was F2), but because it is examined in MA it does not get asked in PM.If you are watching my free lectures, then they are a complete free course for Paper PM and cover everything needed to be able to pass the exam well. The only extra book you need is a Revision Kit because they are full of past exam questions (and other exam standard questions) for practice, and practice is vital to passing the exam.
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