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The Chief Executive Officer of Hybrid Wholesalers is reconsidering the stock valuation procedures of the business. The level of inflation has been around 2-3% in recent years and this level is likely to continue for the foreseeable future. To help the Chief Executive in her deliberations, prepare a short note that sets out which of the three methods of stock valuation discussed in the unit will provide:
(1)the highest reported profit
(2)the lowest closing stock figure on the balance sheet
(3)the most realistic measure of profitPlease do not simply set us questions!!
You presumably have an answer in the same book as you have the question. This forum is for getting help on answers that you have problems with.
We have free lectures on this website covering every part of the Paper F3 syllabus and you need to watch the lectures.
Sir I am not a acca student I am stuck with these kind of question if u can help me solving this question that will be great if not then never mind …
Two of the ways of valuing inventory (FIFO (first in first out) and AVCO (average cost)) are dealt with in our free lectures on Inventory. If prices are rising then FIFO will give a higher inventory value than AVCO (because it assumes that the inventory at the end of the year is the most recent purchases).
Having a higher inventory value will result in a higher reported profit.The third way is LIFO (last in first out) is not allowed by International Accounting Standards and we therefore do not cover it in our lectures. However, it assumes that the closing inventory is older purchases and therefore gives a lower inventory value than the other two. This results in a lower reported profit.
In the long-term the overall profits will not be affected (provided that the same method is used each year) because the inventory at the end of one year becomes the opening inventory at the start of the next year.
Which is the most realistic is debatable, although AVCO does more match the cost of sales with the sales and in that sense is the better.
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