hello, guys
There is one practice about the inventory liquidation:
Note 5. Inventories
Inventories are reported on a last-in, first-out (LIFO) basis. The LIFO reserve was $867 thousand and $547 thousand at the end of 2014 and 2013, respectively. During 2014, the company liquidated certain LIFO inventories that had been carried at lower costs in prior years, and the effect of the liquidation was to decrease COGS by $263 thousand. No LIFO liquidation occurred in 2013.
After adjusting for the LIFO liquidation in 2014, the change in gross profit margin compared with 2013 is most likely:
A. essentially unchanged.
B. higher by 2.5%.
C. lower by 2.3%.
Solution
C is correct.
Gross profit margin = (Sales − COGS)/Sales × 100
Gross profit under LIFO in 2014 ($ thousands) = 11,159 − 9,898 = 1,261
This figure arose in part from the LIFO liquidation, which decreased COGS by $263,000 and hence increased gross profit.
Adjusting the gross profit downward by this amount gives adjusted gross profit ($ thousands) of 1,261 − 263 = 998. (Why is here a subtract, not addition of the liquidation $263? The gross profit should be increased, not decreased.)
Adjusted gross profit margin in 2014 = (998/11,159) × 100 = 8.9%
Gross profit margin in 2013 = (8,895 − 7,901)/8,895 = 11.2%
After adjusting for the LIFO liquidation, gross profit margin is lower by (11.2% − 8.9%) = 2.3%.
Can some one help me?
Best thanks!