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Hello Sir,
Part of a question says that: Most of Hemlock Co’s competitors value their inventory using the AVCO basis whereas Hemlock Co uses the FIFO basis. The value of Hemlock Co’s inventory at 30 September 20X3 (year end date) on FIFO basis is $40M, however on the AVCO basis it would be valued at $36M. By adopting the same method as its competitors (AVCO), the assistant accountant says the company would improve its profit for the year ended 30 September 20X3 by $4M.
My question is; shouldn’t the higher profit actually occur when using FIFO? Since the higher closing inventory would lead to a lower cost of sales and thus a higher profit? Just a bit confused on that part…
Thank you.
Hi,
If we have a lower value of closing inventory, which we would using AVCO in this instance where it is $4m lower, then the profit would be lower too as we are posting a smaller credit to cost of sales.
Thanks
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