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FAIAS 2: Inventories

Former userFormer user14y ago
Hi everyone.

I have trouble understanding the following that always repeat in examination:

In times of rising prices, which method (LIFO, FIFO & Weighted Average) of stock valuation will result a higher profit?

Or you may want to rephrase it (since LIFO is not allowed in IAS 2):

In times of rising prices, using FIFO instead of LIFO in stock valuation will result in a ______. (and the multiple choices come).
eg.
a) Raise reported profits
b) Lower reported profits
c) Lower the value of net assets shown in the Balance Sheet
d) Leave the value of reported profits unchanged

Thanks for your help!

Regards
Su (Singapore) :)
John MoffatJohn MoffatTutor14y ago#1
The only possible answer is (d), but I think more likely you have copied the question wrongly.

The answer is NOT (c), and the reason is that using FIFO values inventory at the most recent prices which will be higher that the earlier prices - so higher inventory valuation and so higher value of net assets.

As regard the profit for the current year, it depends whether the level of inventory is increasing or decreasing over the year. Even though prices are going up, if there is a fall in inventory volume, the total value of inventory could be lower.
So, depending on the total inventories, the answer could be (a), (b), or (d) for the current year !!!

However in the long-term, reported profits would stay the same (because closing inventory of one year is the opening inventory of the following year). Which is why (d) could be correct.

I do think though that you have copied the question wrongly!!!
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