When ending inventory is smaller than beginning inventory, gross margin is less than, if ending inventory were larger than beginning inventory (assuming purchases remain constant).

Question

Quizplus · Accepted Answer

This is because the cost of goods sold (COGS) will be higher with a smaller ending inventory, as it means more units were sold during the period. Therefore, the gross margin, which is calculated by subtracting COGS from revenue, will be lower with a smaller ending inventory. Conversely, a larger ending inventory would mean fewer units were sold and thus a lower COGS, resulting in a higher gross margin.

When Ending Inventory Is Smaller Than Beginning Inventory, Gross Margin