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.
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