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Inventory and IAS 2 Valuation of Inventory – Example 5 – ACCA Financial Accounting (FA) lectures

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  1. Hello Sir,

    While I was solving inventory questions from Kaplan exam kit, I found out slightly different Average cost method over there.
    Question was to compare inventory value using “FIFO” with “periodic weighted average” method.
    If I use their Average cost method for Example 5 then it will be like

    =>300+400+400+400 = 1500 units
    =>(300×12)+(400×12.50)+(400×14)+(400×15) = 20200
    =>20200/1500 = $13.46
    =>So value of the closing inventory = 500 x 13.46 = 6733.33

    Please could you explain which method should be used in exams ?

    Many thanks,

    • By all means do that if you want and you will end up with the same answer. If it is FIFO then we are always selling the oldest first, and therefore the inventory remaining must always be the most recent purchases. It is nothing like LIFO (which is not allowed in financial accounting anyway).

  3. Hello John,

    I need to ask that suppose if we have 500 closing inventory in which 300 bought at 28th Oct $15 each and 200 bought at 30th Oct $14 each. When we get the most recent inventory cost, don’t you think that due to valuing inventory at low cost the balance sheet will be gone understated and the due to not take actual prices may be SPL makes low profit?

  6. Hi John,

    Just a quick question regarding FIFO as I do not undarstand why units bought on the 25th & 20th November have been used rather than the ones bought first i.e on the 10th & 20th of November.

    Can you please advise?

    Many thanks

    • Hi Anya,

      Since the assumption is that those purchased first are also sold first, the remaining units in inventory will always be the most recently purchased, i.e. units will be valued at the cost of the latest purchase/s since these will be the unsold units.

      • Hi Maxcw,

        I thought that FIFO means first in first out and units purchased first i.e on the 10th November will be sold first but it seems that in the above exapmle units last bought i.e 25th November were sold first but this method is called LIFO as far as I remember.

      • Hi Anya,

        FIFO does mean first in, first out. So when an order is received and units are sold, the ‘first in’ are sold, leaving the ‘last in’ in inventory. Remember the purpose of the exercise is to value inventory remaining, not the units sold.

        Since the ‘last in’ are not being sold, they are valued as the remaining inventory.

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