Chapter 8(2)- FIFO and comparision

Question 1

FIFO (first in first out) definition

Answer 1

a Method of valuing inventory that ASSUMES that, unless otherwise indicated, the first items purchased are the first sold, and therefore values inventory sold using the earliest cost price on hand

Question 2

How is an inventory gain recorded under FIFO?

Answer 2

Is valued referring to the most recent (latest) price in the IN column

Question 3

How in an inventory loss recorded under FIFO?

Answer 3

FIFO is used, that is the oldest cost price is the left first

Question 4

Why is an inventory gain under FIFO valued using the most recent price in the IN column?

Answer 4

It is logical to assume that any extra inventory were most likely delivered in the last “batch” delivered

Question 5

How does the inventory gain valuation using FIFO ensure faithful representation?

Answer 5

It reflects the most recent cost price - likely to be more accurate and less subject to bias

Question 6

How are sale returns valued under FIFO (Inventory coming in)?

Answer 6

The cost of each inventory item will be calculated by using the latest cost price shown in the OUT column of the inventory card (unless otherwise stated)

Question 7

Benefits of using FIFO

Answer 7

• It can be applied to all types of inventory
• It costs less to administer than identified Cost

Question 8

Discuss the extent to which the FIFO assumption ensures Faithful
representation/Verifiability in the reports

Answer 8

As it still uses cost prices that are Verifiable by reference to the source document, FIFO still provides a Faithful representation of the value of inventory.
However, under FIFO there is no way of knowing if the cost prices allocated at the time of the sale were in fact those which applied to those individual items of inventory at the time of their purchase. Indeed, the valuation of Cost of Sales under FIFO is biased towards the inclusion of the inventory purchased first, and Inventory on hand biased towards the inclusion of the inventory purchased last.

Question 9

When cost prices are rising how do FIFO and Identified Cost method compare in regard to Cost of Sales

Answer 9

Because FIFO assumes that first items purchased are the first items sold, it assumes that the older, cheaper items have been sold first, leading to COS being lower and Net Profit (and OE) will be higher than Identified Cost.

Question 10

How does using FIFO affect the valuation of inventory on hand

Answer 10

Since FIFO assumes that the most expensive items of inventory remain on hand it can lead to an increase Inventory (Asset) figure then when compared to IC