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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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Replies to This Discussion

Any answer to above

  

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

 increase

 decreased

2013

Change in Closing Inventory

 decreased

  increase

2014

Change in Closing Inventory

 decreased

  increase

2015

Change in Closing Inventory

 decreased

  increase

1. When a company uses FIFO they are less likely to incur old and outdated inventory that can no longer be sold. Accountants have to write off what’s calledobsolete inventory after a certain amount of time goes by and the product is not used or sold. Because FIFO makes sure that the oldest items in stock are used or sold before they are deemed obsolete companies can save money.

2. Inflation happens, actually it’s pretty constantly happening. Let’s say you purchase a batch of dog food in May for $4,000. Come June when you are going to purchase another batch for your inventory, the prices have risen to over $6,000. Using FIFO, you would be selling off the batch from May before you sell off the batch from June, right? So now you can sell the batch from May for the current inflated market price which reduces the impact of inflation on the company.

kiya ye thek hy?

Because of the inflation effect the profit will increase after implication of FIFO. The CGS will decrease because of closing inventory having a larger value.

In the years 2014 and 2015 , the prices have fallen because the FIFO method is representing a larger amount than Weighted average method.

I think, the effect in the last two scenarios. i.e. 2014 and 2015 will be vice versa.

your opinion?

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

 Increase

 Decrease

2013

Change in Closing Inventory

 Decrease

 Increase

2014

Change in Closing Inventory

 Increase

 Decrease

2015

Change in Closing Inventory

 Increase

Decrease

closing inventory of 2013 is the opening inventory of 2014 by compaing ...................all closing inventories are more than its opening inventory 

is it correct?

koi bataye ga kis ka correct hy????????????????????

Because of the inflation effect the profit will increase after implication of FIFO. The CGS will decrease because of closing inventory having a larger value.
esy b dekhyn to b mery wala shi hota hy.............

Aatika Nice work done but Azeem's justification are more appropriate.

2015

Change in Closing Inventory

  increase

decreased

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