ACCA Applied Knowledge · Financial Accounting · Inventories
In a period of rising purchase prices, compared with the weighted average cost method, FIFO will normally result in which one of the following?
FIFO gives a higher closing inventory value and a higher profit when prices are rising. The oldest, cheapest costs go to cost of sales while the most recent, dearer purchases remain in inventory, compared with the weighted average method.
- ALower closing inventory value and lower profit
- BHigher closing inventory value and higher profitCorrect
- CHigher closing inventory value and lower profit
- DLower closing inventory value and higher profit
Explanation
With rising prices, FIFO charges the older, cheaper costs to cost of sales and leaves the latest, higher costs in closing inventory. Cost of sales is lower, so profit is higher, and closing inventory is higher than under average cost.
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