Question 1

Section A

During periods of rising prices (inflation), a steel manufacturing company switches its inventory valuation method from AVCO (Average Cost) to FIFO (First-In, First-Out). What will be the impact on the reported Gross Profit and the closing inventory valuation?

Accepted Answer

Think about what FIFO means: First In, First Out. The oldest inventory is sold first. In inflation, oldest inventory is the cheapest. Cheaper Cost of Sales = Higher Gross Profit. The inventory left over is the newest, which is the most expensive. Therefore, Closing Inventory is higher.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Confusing the effects of FIFO and LIFO (though LIFO is not permitted under IAS 2, the logic is often confused).

Section A

During periods of rising prices (inflation), a steel manufacturing company switches its inventory valuation method from AVCO (Average Cost) to FIFO (First-In, First-Out). What will be the impact on the reported Gross Profit and the closing inventory valuation?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 6

More questions from this exam