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Using the FIFO system for pricing stock issues means that, when prices are rising:
A. Product costs are overstated and profits understated.
B. Product costs are kept in line with prices changes.
C. Product costs are understated and profits understated.
D. Product costs are understated and profits overstated.A firm has a high level of stock turnover and uses the FIFO issue pricing system. In a period of rising purchase prices, the closing stock valuation is:
A. Close to current purchase prices.
B. Based on the prices of the first items received.
C. Much lower than current purchase prices.
D. The average of all goods purchased in the period.i wont answer the question directly …. but instead make u think.
fifo is first in first out. this means what?
lets say u r sitting in april and u buy inventory every month. under fifo, u wd use the inv bought in january first, then use the stuff bought in feb and so on.
if prices r rising, the cost of inv bought in feb will be higher than prices in jan and inv bought in march will be greater than costs in jan and feb.
lets say it cost u 100 in jan, 120 in feb and 130 in march and the price in april is 140.
in april, the current market price will be 140. but under fifo u will be valuing the inv at 100 or 120 or 130.
therefore, your valuation will be LESS than the market current price. this results in the closing inv to be valued at less than the market prices.
now,
gross profit = revenue – cost of goods
cost of goods = opening inv + purchases – closing inv.
now i want u to calculate the profit in the following cases:
1. revenue =400, opening inv=50, purchases=250, closing inv=100
2. revenue=400, opening=50, purchases=250, closing inv=200
what r the profit figures?
compare and then get back to me
FIFO means whenever inv i bought first, these inv will go out first instead last inv, last inv will be kept in cs.
Profit figures
1. 200
2. 300
But what does product costs mean?ooops.. my bad.
ok. so
notice that i have kept all figures the same except the closing inv.
notice how the profits change according the closing inv.
if the closing inv is high, the profits are high
if the closing inv is low, the profits are low.and thus we have a relationship of profit with closing inv.
which is: profits will move with closing inv.
understand and absorb this … then get back to me
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