Question

During 2020, Dang 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 Dang’s records:

            2020 sales (at an average price of $50 a unit) were $2,300,000.

            2020 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

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer - Part 1) Since, the gross profit has increased significantly is comparision to previous, we have to find the reason for the same. Sales has not increased, as compared to last year, so the question lies on the cost component. As the cmpany is following LIFO method, in which last in goods are sold first that is transferred to cost of goods sold. The reason could be the purchase/manufacturing cost of the product has reduced due to decrease of price in the market, as company follows LIFO method, so the cost of goods purchased latter will be transferred to cost of goods sold which are of - low cost. So Cost of goods sold decreases and profit increases.