Topic 3 - Inventory Valuation Methods

Question 1

FIFO (perpetual) structure

Answer 1

Date Received Issued Inventory Value

Question 2

AVCO structure

Answer 2

Date   
Received
Issued
Average cost
Number of units
Total value

Question 3

How to use FIFO (periodic)

Answer 3

Total Received - Total Issued = Z

Z x Latest cost of inventory = FIFO Inventory value

Question 4

Reconciliation of Inventory value (as at)

Answer 4

DEDUCT:
Purchases
Returns In

ADD:
Sales
Returns Out

Question 5

Using Margin to calculate Sales/Purchases

Answer 5

x (1- margin %)

Question 6

Using Mark-up to calculate Sales/Purchases

Answer 6

/ (1. mark up%)

Question 7

Advantages of FIFO

Answer 7

Matches closely what people actually do = easier to understand
Quick and easy to calculate using periodic method

Question 8

Advantages of AVCO

Answer 8

More prudent as it reports lower profits

Smooths out the peaks and troughs of inventory value

Question 9

Why does FIFO always give the highest closing inventory value?

Answer 9

In times of Inflation at the end of the year, only the highest cost purchases are left which FIFO uses to value closing inventory

AVCO takes an average of costs throughout the year

Question 10

Points to mention in a written question

Answer 10

Increase in profits only occurs during the year of change

Both methods comply with Companies Act 2010, IAS2 Inventories and HM Revenue and Customs

Only changed for a good reason in accordance with the concept of consistency