Inventory Valuation

Question 1

What would be an appropriate inventory valuation method for a retailer selling fresh foods using sell-by date rotation techniques ?

Answer 1

FIFO

Question 2

What are the advantages of FIFO ?
AILE

Answer 2

Acceptable to HMRC and IAS2.
Inventory values up-to date prices.
Logical - reflects physical flow.
Easily understood.

Question 3

What are the disadvantages of FIFO ?
CIC

Answer 3

Cumbersome (slow or complicated).
Inflation = reported profits are high due to lagging prices and high closing inventory.
Cost comparisons between jobs are difficult.

Question 4

What are the advantages of LIFO ?
MII

Answer 4

Makes managers aware of recent costs.
Issue prices are up-to-date.
Inflation = reported profits are reduced as closing inventory is valued at a lower cost.

Question 5

What are the disadvantages of LIFO ?
RINCC

Answer 5

Rarely reflects physical use of inventory.
Inventory values become out-of-date.
Not usually accepted by HMRC or IAS2.
Cumbersome.
Cost comparisons between jobs are difficult.