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CA Foundation · Accounting · Inventories

Under AS 2 (Valuation of Inventories), which of the following is the correct description of the FIFO cost formula?

Under FIFO, the items bought first are assumed to be sold first. The goods left in closing stock are therefore treated as the most recent purchases and valued at their cost. The reverse assumption describes LIFO, which AS 2 does not permit.

  1. AItems purchased first are assumed to be sold first, so closing stock is valued at the cost of the most recent purchasesCorrect
  2. BItems purchased last are assumed to be sold first, so closing stock is valued at the cost of the earliest purchases
  3. CEvery sale is costed at the average of the highest and lowest purchase prices of the period
  4. DClosing stock is valued at the lowest purchase price paid during the period

Explanation

FIFO assumes the earliest goods acquired are the first to be issued or sold. The goods remaining in stock are therefore taken to be the latest purchases and are valued at their cost. Option B describes LIFO, which AS 2 does not permit as a cost formula.

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