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MGT101 - Financial Accounting GDB No. 01 Solution and Discussion Spring 2013 Due Date 02-07-2013

opic to be tested:

  • Valuation of stock/inventory

Learning Objectives:

  • To develop an understanding about inventory valuation methods and their impact on financial performance & financial position of a business.

Discussion Question:

Mr. Arslan is a newly employed accountant of Good Company Limited (GCL). He records cost of goods sold at most recently purchase price and inventory at cost of earliest purchases to minimize the amount of tax burden in the period of inflation. Due to this, profitability of the firm is reduced as intended but current replacement cost of inventory is not showing a true and fair result in balance sheet and lower profit is also posing a poor impact on its share’s market price.

  1. Which costing method for inventory valuation is currently applied by Mr. Arslan?
  2. Which costing method for inventory valuation do you suggest to overcome the above mentioned problem? Support your answer with logical reasons.


Note: To avoid negative marking complete your comment within 100 words.

Important Instructions:

 

1.     Your discussion must be based on logical facts.

2.     The GDB will remain open for 3 working days/ 72 hours.

3.     Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4.     Obnoxious or ignoble answer should be strictly avoided.

5.     Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

Views: 3701

Replies to This Discussion

2markx ki ha...............

just     2 marks ka kiyaa mtlb huaaaaaaaaaa 

What you think about FIFO method

LIFO method hy solid reasons to den...

FIFO method is the best way to reduce the omission and make the true profit statement and balance sheet q k wo jo sale karta hy goods ko to woo jo recently purchase ki hoti hy jis say us ko profit reduce ho raha hy

....just  2 number ab yai b aty hy k ni ab usy kya chahiyai gdb mai  

yup corrctt ill go wid lifo method

Please Discuss here about this GDB.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.


Don’t wait for solution post your problems here and discuss ... after discussion a perfect solution will come in a result. 

So, Start it now, replies here give your comments according to your knowledge and understandings....

Thanks

Dear Students;

Our main purpose here discussion not just Solution. Don’t wait for solution post ur problems here and discuss, after discussion we get right solution.

Idea For GDB MGT101

Inventory Valuation Methods Introduction

Inventory valuation methods are used to calculate the cost of goods sold and cost of ending inventory. Following are the most widely used inventory valuation methods:

  1. First-In, First-Out Method
  2. Last-In, First-Out Method
  3. Average Cost Method

First-in-First-Out Method (FIFO)

According to FIFO, it is assumed that items from the inventory are sold in the order in which they are purchased or produced. This means that cost of older inventory is charged to cost of goods sold first and the ending inventory consists of those goods which are purchased or produced later. This is the most widely used method for inventory valuation. FIFO method is closer to actual physical flow of goods because companies normally sell goods in order in which they are purchased or produced.

Last-in-First-Out Method (LIFO)

This method of inventory valuation is exactly opposite to first-in-first-out method. Here it is assumed that newer inventory is sold first and older remains in inventory. When prices of goods increase, cost of goods sold in LIFO method is relatively higher and ending inventory balance is relatively lower. This is because the cost goods sold mostly consists of newer higher priced goods and ending inventory cost consists of older low priced items.

Average Cost Method (AVCO)

Under average cost method, weighted average cost per unit is calculated for the entire inventory on hand which is used to record cost of goods sold. Weighted average cost per unit is calculated as follows:

Weighted Average Cost Per Unit=  Total Cost of Goods in Inventory
Total Units in Inventory

The weighted average cost as calculated above is multiplied by number of units sold to get cost of goods sold and with number of units in ending inventory to obtain cost of ending inventory.




Inventory valuation is the dollar amount associated with the items contained in a company’s inventory. Initially the amount is the cost of those items. However, under certain situations the cost could be replaced with a lower dollar amount.

The inventory valuation includes all of the costs to get the inventory items in place and ready for sale. The inventory valuation excludes the costs of selling and administration.

Since the inventory items are constantly being sold and restocked and since the costs of the items are constantly changing, a company must select a cost flow assumption. Cost flow assumptions include first-in, first-out; weighted average; and last-in, first out. The company must consistently follow its stated cost flow assumption.

A manufacturer’s inventory valuation will include the costs of production, namely direct materials, direct labor, and manufacturing overhead. Manufacturers are also required to consistently follow their cost flow assumptions.

Inventory valuation is important in that it affects the cost of goods sold reported on the company’s income statement. Inventory is also an important component of a company’s current assets, working capital, and current ratio.




great work by  Hani MIT 

Inventory Valuation Methods

Inventory valuation methods are used to calculate the cost of goods sold and cost of ending inventory. Following are the most widely used inventory valuation methods:

First-In, First-Out Method
Last-In, First-Out Method
Average Cost Method

First-in-First-Out Method (FIFO)

According to FIFO, it is assumed that items from the inventory are sold in the order in which they are purchased or produced. This means that cost of older inventory is charged to cost of goods sold first and the ending inventory consists of those goods which are purchased or produced later. This is the most widely used method for inventory valuation. FIFO method is closer to actual physical flow of goods because companies normally sell goods in order in which they are purchased or produced.

Last-in-First-Out Method (LIFO)

This method of inventory valuation is exactly opposite to first-in-first-out method. Here it is assumed that newer inventory is sold first and older remains in inventory. When prices of goods increase, cost of goods sold in LIFO method is relatively higher and ending inventory balance is relatively lower. This is because the cost goods sold mostly consists of newer higher priced goods and ending inventory cost consists of older low priced items.

Average Cost Method (AVCO)

Under average cost method, weighted average cost per unit is calculated for the entire inventory on hand which is used to record cost of goods sold. Weighted average cost per unit is calculated as follows:

Weighted Average Cost Per Unit= Total Cost of Goods in Inventory
Total Units in Inventory
The weighted average cost as calculated above is multiplied by number of units sold to get cost of goods sold and with number of units in ending inventory to obtain cost of ending inventory.

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