ExpertMedium2 marksMultiple Choice
ACCA · Question 24 · Recording Transactions: Inventory
Section A
In a period of inflation, which of the following statements about the impact of inventory valuation methods is true?
Section A
In a period of inflation, which of the following statements about the impact of inventory valuation methods is true?
Answer options:
A.
FIFO will result in a lower gross profit than AVCO.
B.
FIFO will result in a higher valuation of closing inventory than AVCO.
C.
AVCO will result in a higher valuation of closing inventory than FIFO.
D.
There is no difference in profit between FIFO and AVCO over the life of the business.
How to approach this question
Consider the mechanics of FIFO during rising prices. The oldest (cheapest) items are sold, leaving the newest (most expensive) items in closing inventory. Therefore, closing inventory is higher under FIFO than under an average cost method.
Full Answer
B.FIFO will result in a higher valuation of closing inventory than AVCO.✓ Correct
During inflation, prices rise. FIFO (First-In, First-Out) assumes the oldest, cheapest inventory is sold first, leaving the newest, most expensive inventory in the warehouse. Therefore, closing inventory under FIFO will be higher than under AVCO (which averages the old and new costs).
Common mistakes
Reversing the impact of FIFO and AVCO.
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