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Hi chris can you have look at mcq june 2015
Q20
It says which would explain fall in operating profit margin compared to prev yearThe answer says inventory value at average cost basis from fifo and inflation
I want to refute by asking why is the answer not d? The above gives specifically a decrease in gross profit
And
D: change in amortization of development cost from include in cos to admin expenseWouldnt this increase expense and specifically decrease op profit
After all they are asking op profit which is please correct me if im wrong is pbit… yes
So another arguement for not d maybe they say that it doesnt actually cause a change but deduct from cos deduct again from op expenseSo then c would be a stark change of “fall” in value albeit at gross level which then feeds through op.
So which is better my lord?
Justification if each would be nice
I friggin hate argumentative. Lets call a spade a spade. And thanksHi,
If we have changed to FIFO then the closing inventory is valued at the most recent purchase price, which given prices have been rising means that it will be higher than if we were to use AVCO.
If we have a higher closing inventory value then the cost of sales will be lower and thus gross profit will be higher. If this is higher then the operating profit will be higher too as it follows on after the gross profit.
It cannot be due to changing where we charge the amortisation expense as whether it is in cost of sales of admin expenses it will still impact operating profit in exactly the same way, i.e. reduce it.
Hope this clears it up.
Thanks
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