question archive Mr Luis Rodriguez is the financial manager of Hull plc, a UK company which is located in the east of London
Mr Luis Rodriguez is the financial manager of Hull plc, a UK company which is located in the east of London
Subject:AccountingPrice:5.89 Bought7
Mr Luis Rodriguez is the financial manager of Hull plc, a UK company which is located in the east of London. Hull Plc has the following inventory transactions: Day 1 Opening inventory nil Day 2 Purchased 50 units at £15 per unit Day 3 Sold 20 units at £35 per unit Day 4 Purchased 60 units at £17 per unit Day 5 Purchased 80 units at £30 per unit Day 5 Sold 30 units at £40 per unit You Are Required To: i) Apply the Average costing method to each transaction and calculate the closing value of inventory (6 Marks) ii) Prepare the report to critically evaluate the LIFO and FIFO inventory valuation methods and advise which method is better. In addition, explain which method Hull plc should use to remain IAS 2 compliant
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Answer:-
(i) Value of inventory by using average costing method
| Items | Closing units | Average price(per units) | Working of calculate average cost |
| Day 2 purchase 50 units at 15 | 50 | 15 | |
| Day 3 sold 20 units at 35 per units(cost will apply cost 15 per units) | 30 | 15 | |
| Day 4 purchase 60 units at 17 | 90 | 16.33 | (30*15)+(60*17)/90 |
| Day 5 purchase 80 units at 30 per units | 170 | 22.76 | (16.33*90)+(80*30)/170 |
| Day 5 sold 30 units(at 22.76 cost per units) | 140 | 22.76 |
So therfore the value of closing stock (using average cost for each transaction)=3186.4 (140*22.76)
Note -As given in question, value of closing stock is require to compute using average cost for each transaction. So above solution has been arrived using perpetual inventory system of average costing method.
(ii)
Value of inventory using FIFO:-
| Items | Amount(Closing stock) |
| Day 2 purchase 50 units at 15 | 750(50*15) |
| Day 3 sold 20 units at 35 per units(cost will apply cost 15 per units) | 450(30*15) |
| Day 4 purchase 60 units at 17 | 1470=1020+450 |
| Day 5 purchase 80 units at 30 per units | 3870=1470+2400 |
| Day 5 sold 30 units(30 units at 15 per units) | |
| So amount of closing stock will be(1020+2400) | 3420 |
So therefore value of closing stock using FIFO =3420
Value of inventory using LIFO:-
| Day 3 sold 20 units(value at 30 per units LIFO) | 600 |
| Day 5 sold 30 units(value at 30 per units LIFO) | 900 |
| Value of closing stock(50*15+60*17+30*30) | 2670 |
So therefore value of closing stock using LIFO =2670
So therefore the LIFO method is better because value as per LIFO(2670) is lower than FIFO(3420).and it is always better to value inventory at lower amount . So LIFO is better to value of inventory
ISA-2:- To complianc of IAS 2 Company require to adopt either FIFO or average inventory method because IAS 2 is not allow to use LIFO. So therefore LIFO method cannot be used for inventory valuation . In compliance of IAS 2 it is better to apply average cost method because value as per average cost method is 3186.4 as compare to FIFO value =3420(Lower of value as per average cost). So it is better to use average cost method as per IAS 2
