CFA Level I · CFA Level I Exam · Analysis of Inventories
A company reporting under IFRS sells inventory in a period of rising purchase costs. Compared with the weighted average cost method, the FIFO method will most likely report:
FIFO most likely reports lower cost of sales and higher gross profit than weighted average when costs are rising, because the oldest and cheapest units are expensed first while the newest, more expensive units stay in ending inventory.
- Alower cost of sales and higher gross profitCorrect
- Bhigher cost of sales and lower ending inventory
- Clower ending inventory and lower gross profit
Explanation
With rising costs, FIFO assigns the older, cheaper costs to cost of sales. Cost of sales is therefore lower than under weighted average, gross profit is higher, and ending inventory (the newest, dearer costs) is higher. The other options reverse these effects.
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