HELP

[sararara565]

what is the effect on net profit and gross profit when cost prices are falling
and then when cost prices are rising?
thanks!

[Nima2703]

This is all i know about gross profit when falling, i guess rising prices effect on gross profit could be worked out from this answer

The FIFO method of stock recording is where it is assumed that the first stock purchased will be the first stock sold. This is because it is expensive, difficult, or impractical to determine the actual cost of sale when selling stock. This would especially occur with liquids such as petrol. If cost prices of stock are falling, it is assumed that the older, more expensive stock is sold first. The effect on gross profit will depend on how stock is sold in the business. If a set dollar amount or fixed percentage is added to the cost price, as cost price falls, selling price will also fall. The margin of cost of sales and sales will remain unchanged, therefore gross profit will decrease per unit sold. However, if the business sets a selling price, regardless of cost price, then as cost price falls, the margin of sales and cost of sales will increase, leading to an increasing gross profit.

[abcdqdxD]

Lets not overcomplicate it too much.

When prices are rising: cost of sales will be understated, net profit overstated
When prices are falling: cost of sales will be overstated, net profit understated

Important thing here is to note that FIFO is an assumption only, it does not physically identify movements of stock. In reality, the oldest stock will not always be sold first, and hence there are implications as the above mentioned. If you can understand that concept, it makes things a whole lot easier.

[Nima2703]

I just got that off the NEAP solutions for a four mark question, because it is assumed that thè first stil is sold first, that's what will be shown in the income statement