You are recently hired as a staff accountant for a small finished goods manufacturing company. Part...

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Accounting

You are recently hired as a staff accountant for a smallfinished goods manufacturing company. Part of your duties includedoing the month end inventory of finished goods. After a few monthsyou do not look forward to this as the amount of inventory seems tobe increasing. In order to satisfy your thoughts on this increaseof inventory you decide to review the financial information for thelast few months.
Looking over the Income Statement you see the profits have beensteady, but the gross profit percentage has increased, and the costof goods sold have decreased. This does not seem possible as thecompany has increased the amount of inventories.
Identify why this situation could exist, providing anexplanation which can be given to the CFO.
In order to assist in controlling the costs and providing alower inventory carrying cost, select a costing system and explainwhy it should be utilized.

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4.1 Ratings (764 Votes)

It is to be noted that profits are in a steady state but gross profit is increasing which indicates there is an increase in sales And the contention of accountant that gradual increase in amount of inventories As net profit is not increasing and gross profit is increasing which shows there is continuous increase in operating cost in proportion with Gross profit The situation is illustrated below Year 20x1 See Answer

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