Question Help – Inventory Valuation. Thank you in advance!

Hello everyone,

I’m working through the Kaplan F3 question bank and I’ve got to this question:

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In the year ended 31 August 20X4, Aplus’ records show closing inventory of 1,000 units compared to 950 units of opening inventory.

Which of the following statements is true assuming that prices have fallen throughout the year?

A Closing inventory and profit are higher using FIFO rather than AVCO.
B Closing inventory and profit are lower using FIFO rather than AVCO.
C Closing inventory is higher and profit lower using FIFO rather than AVCO.
D Closing inventory is lower and profit higher using FIFO rather than AVCO.

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The answer was B.

However, I’m a bit confused.

If closing inventory is valued at a lower price, doesn’t this mean that you will have a greater profit, because your margin is greater?

Revenue – Cost of sales = Gross Profit.

If the “Cost of sales” figure (Inventory price) is lower, you take less off the revenue, and aren’t your profits therefore greater?

I’d be really grateful if somebody could explain this in simple terms to me!

Thank you very much in advance!

Andrew