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Chap 9 example 5

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › Chap 9 example 5

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • April 16, 2024 at 11:48 pm #704197
    AlinaaF
    Participant
    • Topics: 31
    • Replies: 17
    • ☆

    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 = $7250

    Total costs:
    FiFo = $4600
    LiFo = $5900
    Weighted avg = $4760

    Profits:
    FiFo = $10400
    LiFo = $9100
    Weighted avg = $10240

    Basically 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 = Medium

    Profits:
    FIFO = Highest
    LIFO = Lowest
    Weighted avg = Medium

    Total COGS:
    FIFO = Lowest
    LIFO = Highest
    Weighted avg = Medium

    Sorry to ask you in depth but really needed to know them all. Are they all correct?

    April 17, 2024 at 7:02 am #704204
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    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).

    April 18, 2024 at 5:58 am #704239
    AlinaaF
    Participant
    • Topics: 31
    • Replies: 17
    • ☆

    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?

    April 18, 2024 at 6:08 pm #704269
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    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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