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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

In a period of steadily rising purchase prices, compared with the LIFO method, the FIFO method of inventory valuation will result in which of the following?

FIFO gives a higher closing inventory value and a higher profit than LIFO when prices rise. Older, cheaper costs go to cost of sales, which lowers it and raises profit, while the latest, dearer purchases stay in closing inventory.

  1. AHigher closing inventory value and higher reported profitCorrect
  2. BHigher closing inventory value and lower reported profit
  3. CLower closing inventory value and higher reported profit
  4. DLower closing inventory value and lower reported profit

Explanation

With rising prices, FIFO charges the older, cheaper costs to production or cost of sales, so cost of sales is lower and profit is higher. The units left in inventory are the most recent, more expensive ones, so closing inventory is higher. LIFO has the opposite effect on both.

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