ACCA AA · Chapter 6 · Question 11 of 11
Wimble Co's revenue for the year is $8.0 million. Its gross margin has been stable at 35% for several years and no changes in pricing or costs are known. The draft cost of sales is $5.5 million. Which of the following is the most appropriate conclusion from this analytical procedure?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Cost of sales is $300,000 higher than expected, which could indicate that closing inventory is understated
Explanation
Expected cost of sales = $8.0m x (100% - 35%) = $5.2m. Actual is $5.5m, so it is $0.3m higher than expected (giving a gross margin of 31.25%). Closing inventory is deducted in arriving at cost of sales, so an understatement of closing inventory would inflate cost of sales; overstated inventory would have the opposite effect.
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