Inventory valuation flashcards

Question 1

What is FIFO?

Accepted Answer

First In, First Out — earliest purchases are treated as sold first.

Question 2

Closing inventory under FIFO when prices rise?

Accepted Answer

Valued at newer (higher) costs → higher closing inventory value.

Question 3

Effect on profit when prices rising?

Accepted Answer

Lower COGS (older cheaper units sold) → higher gross profit vs LIFO/other methods.

Question 4

Cost of sales formula?

Accepted Answer

Opening inventory + Purchases − Closing inventory.

Question 5

Why physical stocktake?

Accepted Answer

Detect theft, damage, errors; adjust records to actual quantities.

Question 6

Inventory on SOFP?

Accepted Answer

Current asset at valuation (FIFO cost).

Question 7

Risk of obsolete inventory?

Accepted Answer

Overstated asset and profit if not written down.

Question 8

Link to efficiency ratios?

Accepted Answer

Inventory days (10.2.3) uses closing inventory and COGS.

Question 9

What is inventory valuation?

Accepted Answer

The process of assigning a monetary value to a company's unsold inventory at the end of an accounting period. This value is used to calculate Cost of Goods Sold (COGS) and is reported as a current asset on the Statement of Financial Position.

Question 10

What is the core principle of the FIFO inventory valuation method?

Accepted Answer

First-In, First-Out. It assumes that the first inventory items purchased are the first ones to be sold. Closing inventory is therefore valued at the cost of the most recently purchased items.

Question 11

How does FIFO affect gross profit during a period of rising prices (inflation)?

Accepted Answer

It leads to a higher gross profit. This is because the Cost of Goods Sold (COGS) is based on the older, lower-cost inventory, while revenue reflects current, higher selling prices.

Question 12

How does FIFO affect the value of closing inventory on the Statement of Financial Position during inflation?

Accepted Answer

It results in a higher valuation of closing inventory. This is because the remaining stock is valued at the most recent, higher purchase prices, giving a more realistic current asset value.

Question 13

What is the main practical advantage of using a FIFO system for physical stock control?

Accepted Answer

It helps to minimise waste and obsolescence by ensuring that older stock is used or sold before newer stock. This is particularly important for perishable goods or products with a short life cycle.