2: Inventory Valuation

Question 1

What are the four methods of inventory valuation studied?

Answer 1

FIFO

LIFO

Cumulative Weighted Average Basis

Period Weighted Average Basis

Question 2

Why is inventory valuation important?

Answer 2

Financial reporting - recorded in statements at the lower of cost and NRV

Costing - sales price can be calculated after cost is determined

Businesses must consistently use an appropriate basis

Question 3

Sum up the four methods very quickly?

Answer 3

FIFO - materials issued in order they were delivered

LIFO - materials issued in reverse order

CWA - average price with running totals, recalc after each receipt

PWA - average, based on all purchases for the period

Question 4

Ads and Dis of FIFO?

Answer 4

Ads:
- logical - reflects physical flow
- easily understood
- inventory valued at up to date prices
- acceptable to HMRC and IAS2

Dis:
- cumbersome
- when prices rise, highest closing inventory and highest profits
- comparisons are difficult

Question 5

How to value closing inventory under FIFO?

Answer 5

1. Find closing inventory
2. Work backwards from the end

Question 6

How to value issues under all four methods?

Answer 6

1. Add up the value of opening inventory and receipts
2. Take away the value of the closing inventory

You will be left with the value of issues!

Be careful of going chronologically, you may run out of stock of a certain price

Question 7

Ads and Dis of LIFO?

Answer 7

Ads:
- issue prices are up to date
- with rising prices, closing inv valued lowest, and profits being reduced
- managers aware of recent costs

Dis:
- doesn’t reflect physical use
- cumbersome
- not acceptable
- inventory values out of date
- difficult to compare

Question 8

How to value closing inventory under LIFO?

Answer 8

1. Find the amount of closing inventory
2. Work forwards!

Question 9

What kind of business could use the CWA?

Answer 9

Any where deliveries are fully mixed in, like an oil merchant

Question 10

Ads and Dis of CWA?

Answer 10

Ads:
- acceptable to HMRC and IAS2
- logical
- fluctuations in price are smoothed out

Dis:
- issue prices and inv valuations are not an actual purchase price
- the above may lag behind current values

Question 11

How to value closing inventory under CWA?

Answer 11

1. Set out your Q U V columns
2. Before each issue, make sure you do a RECALC of the running totals, so you get a new weighted average.
3. Apply that average to the next issues.
4. Keep going until you get to the end, and you’ll have the number of closing inv and the value of them!

Question 12

How to value closing inventory for PWA?

Answer 12

1. Determine the total value of the opening inv and purchases for the period
2. Divide this by the number of units in opening inv and purchases to get average
3. Apply this average cost to the amount of closing inventory

Question 13

How long do profit differences last when caused by valuation method?

Answer 13

These are temporary, profit will get evened out

Question 14

What are the three steps to calculating gross profit when valuing inventory?

Answer 14

These want P&L and CoS context

1. Calculate the value of the closing inventory
2. Do an extract of P&L and fill out a cost of sales
3. Determine the profit from there

Question 15

In rising prices, what is the order of methods from highest profits to lowest?

Answer 15

FIFO
Averages
LIFO

Question 16

In falling prices, what is the order of methods from highest profits to lowest?

Answer 16

LIFO
Averages
FIFO