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# FINANCIAL ACCOUNTING-II (MGT401) ASSIGNMENT NO. 01 DUE DATE: May 26, 2014 MARKS: 10

SEMESTERSPRING 2014
FINANCIAL ACCOUNTING-II (MGT401)
ASSIGNMENT NO. 01
DUE DATE: May 26, 2014
MARKS: 10

Learning Objectives
To give the students in depth knowledge of valuation of inventories and to make them
realize that difference arises in books of accounts due to selection of different
inventory valuation method.

Learning Outcomes
Students will be able to get comprehensive knowledge about inventory valuation
methods; FIFO and weighted average method.

Case
GEAR-UP Pvt. Ltd is a leading motorcycle spare parts manufacturer in Pakistan. Prices of auto
spare parts have been changing from previous four years drastically, due to inflation prevails in
the country thus the prices of spare parts are considered volatile. As per rule of IAS -2 there are
two methods available one is ‘FIFO’ (first-in, first-out) and second is ‘weighted-average cost
method’ to measure the cost of inventory. In and out record of product “SP001” has been
extracted form books of GEAR-UP Pvt. Ltd as on December 31, 2013 is as follows:

Details of “SP001” received and issued as on December, 31 2013
Date Description Per unit in Rs.
Dec.1st
Dec.10th Sold 150 units
Dec.30th Sold 80 units

REQUIREMENTS:
Calculate the cost of inventory under FIFO and weighted average method. (05Marks)
Calculate Gross profit under both methods if selling price of SP001 is Rs.250 per unit. (03Marks)
Give the reason of difference in profit under both methods, which method results in higher tax
burden and why? (02Marks)

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### Replies to This Discussion

Arslan Muzaffar

Mc 130200835

Solution:

 FIFO Method Date Received Issued Balance Units Cost Amount Units Cost Amount Units Cost Amount 1-Dec 200 130 26000 200 130 26000 8-Dec 300 150 45000 200 130 26000 300 150 45000 10-Dec 150 130 19500 50 130 6500 300 150 45000 22-Dec 100 200 20000 50 130 6500 300 150 45000 100 200 20000 30-Dec 50 130 6500 270 150 40500 30 150 4500 100 200 20000 Weighted Average Method Date Received Issued Balance Units Cost Amount Units Cost Amount Units Cost Amount 1-Dec 200 130 26000 200 130 26000 2-Dec 300 150 45000 500 142 71000 10-Dec 150 142 21300 350 142 49700 22-Dec 100 200 20000 450 154.89 69700.5 30-Dec 80 154.89 12391.2 370 154.89 57309.3

Part B

To calculate Gross profit under FIFO Method:

Unit Sold=150+80=230

Sale Price= 230×250= 57,500

Cost= 19,500+4,500+6500=30500

As we know that the formula of Gross profit is

Gross Profit = Sales – Cgs

Gross profit =57500-30500

Gross Profit =27000

To calculate gross Profit under weighted Average Method:

Units Sold = 150+180 =230

Sale price =230 x 250 = 57500
Cost =21300+12391.2=33691.2

As we know the formula of Gross profit

Gross profit = Sales – Cgs

Gross profit = 57500-33691.2

Gross Profit = 23808.8

Part b

FIFO method will result in Higher Tax because material purchased for the first time would be in stock and the price would be higher than the opening stock.

The Weighted Average Cost Method

This method assumes that we sell all our inventories simultaneous

The weighted average cost method is most commonly used in manufacturing businesses where inventories are piled or mixed together and cannot be differentiated, such as chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those bought yesterday, as they are all mixed together.

So we work out an average cost for all chemicals that we have in our possession. The method specifically involves working out an average cost per unit at each point in time after a purchase.

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