Question Completion:
Required:
(a) Calculate the total value of products A, B and C which should be shown in inventory in the statement of financial position.
(b) Explain the difference that changing from a weighted average to FIFO method of inventory valuation is likely to have on an entity's profit or loss.
Answer:
Villandry
a) Total value of products A, B, and C based on:
Net realizable List price
Value
Shs. Shs.
Ending value 10,486 12,000
b) The difference that changing from a weighted average to FIFO method of inventory valuation is likely to have on an entity's profit or loss:
The weighted average method of inventory valuation accumulates and assigns cost of inventory based on the weighted average. This simply means that the cost of goods available for sale is obtained and then divided by the number of goods available for sale. The average cost obtained is used to value the cost of goods sold and the ending inventory.
On the other hand, the FIFO method assumes that goods that are first to be in the store are the ones that are sold first. This means that the cost of goods sold is valued at the cost of the first goods that are available for sale and the ending inventory is valued at the cost of newly purchased goods, since they are the ones that are still in stock by the FIFO assumption.
The implication of moving from the weighted average method to the FIFO method is that the FIFO method reflects the cost of newly acquired goods in the ending inventory better than the average cost using the weighted average, especially if prices are rising.
Step-by-step explanation:
a) Data and Calculations:
Net realizable List price
Shs. Shs.
Product A 3,600 5,100
Product B 2,900 2,800
Product C 4,200 4,100
Valuation 10,700 12,000
Discounted 10,486 12,000
