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Is it true that according to example 5 of chapter 9 on inventory we can conclude the figures for closing inventory, total cost and profit balances under difference inventory valuation methods. I know there is no Lifo scenario given in the notes but i did solve the same example for the Lifo method myself from the example you used in your lecture. I hope you can correct me if i am wrong anywhere…
Closing inventory:
FiFo = $7400
LiFo = $6100
Weighted avg = $7250Total costs:
FiFo = $4600
LiFo = $5900
Weighted avg = $4760Profits:
FiFo = $10400
LiFo = $9100
Weighted avg = $10240Basically we can conclude several things from the example above about closing inventory, profits and total costs as following:
Closing inventory:
FIFO = Highest
LIFO = Lowest
Weighted avg = MediumProfits:
FIFO = Highest
LIFO = Lowest
Weighted avg = MediumTotal COGS:
FIFO = Lowest
LIFO = Highest
Weighted avg = MediumSorry to ask you in depth but really needed to know them all. Are they all correct?
LIFO is irrelevant for Paper FA because it is not a method allowed by the accounting standards.
Your ‘conclusions’ are correct as regards the closing inventory valuations if costs are increasing (as is obviously usually going to be the case). As far as profits are concerned, appreciate that although they are affected from year to year in the long-term it will make no difference (because the closing inventory of one year is the opening inventory of the following year).
You are saying that the difference costs of closing inventory is because of the inflation?
I don’t really get it, what you said about the profits up there, how profits are affected every year first of all then how does opening inventory does not make a difference even though it is last year closing inventory!?
Is it also true that these figures remain true only if we assume that we do not have any opening inventory otherwise these figures might not hold true?
Please comment that the profit we calculated here is the gross profit and it is basically not the net profit that we are considering here, is that correct?
A higher closing inventory in one year results in a higher profit for that year. The same inventory becomes the opening inventory for the following year, and a higher opening inventory results in less profit in the following year.
Yes – we are talking about the gross profit, but obviously a higher or lower gross profit automatically results in a higher or lower net profit.
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