Relation of Profit to
Opening & Closing Inventory

Q: Why is the gross and net profit directly proportional to the closing inventory? So if the stock is over valued, the profit increases, and vice versa.


While profit is inversely proportional to the beginning inventory. So if stock is over valued, the profit decreases, and vise versa...?

A: It's simply the nature of the following two formulas when you combine them:

1. Sales - Cost of Goods Sold = Gross Profit
2. Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory

If you substitute 2. above into 1. you get:
  • Gross Profit = Sales - (Opening Inventory + Purchases - Closing Inventory)

  • Gross Profit = Sales - Opening Inventory - Purchases + Closing Inventory



Hope that makes sense.

Comments for Relation of Profit to
Opening & Closing Inventory

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Well Explained
by: Jhanzeb

The logic here is explained very well.

Thanks a lot for the feedback, Jhanzeb. Glad to know it helps.

Best,
Michael C.
Accounting Basics for Students

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