ExpertMedium2 marksMultiple Choice
ACCA · Question 10 · Recording transactions and events
During a period of consistently rising prices (inflation), which inventory valuation method will result in the highest reported gross profit?
During a period of consistently rising prices (inflation), which inventory valuation method will result in the highest reported gross profit?
Answer options:
A.
FIFO (First-In, First-Out)
B.
LIFO (Last-In, First-Out)
C.
AVCO (Average Cost)
D.
Standard Costing
How to approach this question
Analyze how the cost flow assumption affects Cost of Sales. Lower Cost of Sales = Higher Profit.
Full Answer
A.FIFO (First-In, First-Out)✓ Correct
Under FIFO, the oldest (and therefore cheapest, in a period of inflation) inventory is assumed to be sold first. This leads to a lower Cost of Sales figure compared to AVCO, which in turn maximizes the reported Gross Profit.
Common mistakes
Thinking that higher closing inventory value leads to lower profit (it's the opposite).
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