Topic 3 - Inventory Valuation Methods Flashcards Preview

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Flashcards in Topic 3 - Inventory Valuation Methods Deck (10)
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1
Q

FIFO (perpetual) structure

A

Date Received Issued Inventory Value

2
Q

AVCO structure

A
Date   
Received
Issued
Average cost
Number of units
Total value
3
Q

How to use FIFO (periodic)

A

Total Received - Total Issued = Z

Z x Latest cost of inventory = FIFO Inventory value

4
Q

Reconciliation of Inventory value (as at)

A

DEDUCT:
Purchases
Returns In

ADD:
Sales
Returns Out

5
Q

Using Margin to calculate Sales/Purchases

A

x (1- margin %)

6
Q

Using Mark-up to calculate Sales/Purchases

A

/ (1. mark up%)

7
Q

Advantages of FIFO

A

Matches closely what people actually do = easier to understand
Quick and easy to calculate using periodic method

8
Q

Advantages of AVCO

A

More prudent as it reports lower profits

Smooths out the peaks and troughs of inventory value

9
Q

Why does FIFO always give the highest closing inventory value?

A

In times of Inflation at the end of the year, only the highest cost purchases are left which FIFO uses to value closing inventory

AVCO takes an average of costs throughout the year

10
Q

Points to mention in a written question

A

Increase in profits only occurs during the year of change

Both methods comply with Companies Act 2010, IAS2 Inventories and HM Revenue and Customs

Only changed for a good reason in accordance with the concept of consistency