Question 1

Section A

During a period of consistently rising prices, a company is deciding whether to use the First-In, First-Out (FIFO) or the Average Cost (AVCO) method for inventory valuation.

Compared to AVCO, what will be the effect of using FIFO on the company's gross profit and closing inventory valuation?

Accepted Answer

Think about which costs go where. FIFO means older (cheaper) items are sold, so Cost of Sales is lower, making Profit higher. Newer (expensive) items remain in inventory, making Closing Inventory higher.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Confusing the impact of FIFO vs LIFO (though LIFO is not permitted under IAS 2, the logic is often tested).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 5

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