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Graded Discussion Board 02

Financial Accounting II (MGT401)

Topic: Valuation of Inventory

XYZ Ltd. is a manufacturer of readymade garments. Company’s accounts officer has suggested the management to change its accounting policy relating to inventory valuation method from weighted-average cost method (WAC) to first-in first-out (FIFO). It was considered that FIFO method reflects the usage of inventory more accurately in response of economic cycle.

Accounts officer has determined following differences, if company changes its inventory valuation method from weightage average method to first-in, first-out method.

Weighted Average Method (Rs.)

First-in, First-out (Rs.)

Inventory at 1st January 2013

25,000

22,000

Inventory at 31st December 2013

36.000

30,000

Inventory at 31st December 2014

48,000

50,000

Inventory at 31st December 2015

64,000

70,000

Requirement:

a) On the basis of given data, you are required to mention that what will be the effect of change in inventory valuation method by filling the table given below.

Year

Particulars

Effect on Cost of Goods Sold

(simply mention that whether it will increase or decrease)

Effect on Profit

(simply mention that whether it will increase or decrease)

2013

Change in Opening Inventory

2013

Change in Closing Inventory

2014

Change in Closing Inventory

2015

Change in Closing Inventory

b) Justify your answer with logical arguments.

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