Question

QUESTION 2. During 2019, Smith Inc. showed a large increase in gross profit on sales, as compared to recent prior years. Your audit senior asks you to figure out the most likely reason for this increase, given that sales had not increased very much from last year. Support your answer. You find this information from Smith's records: 2019 sales (at an average price of $50 a unit) were $2,300,000. 2019 purchases (at an average cost of $30 a unit) were $1,200,000 The company uses the LIFO inventory method and has used it since 1978.

Answer 1

Most Likely Reason for Large Increase in Gross profit compared to recent prior years even sales have not increased very much from last year may be Significant decrease in the cost of the unit in current year if company uses LIFO Inventory Method.

Explanation :

In LIFO Inventory Method, cost of Last Purchased Material is expensed first as cost of good sold. Hence, if Cost is Decreased in current year then it shows high profit in current year due to latest purchase cost is assigned in LIFO Inventory Method which is low compared to old inventory.