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

Which of the following is a recognised reason why LIFO is not permitted for inventory valuation in financial statements under IFRS, although it may be used for internal costing?

LIFO values closing inventory at the oldest purchase costs, so the statement of financial position can show figures well out of line with current cost. For this reason IFRS does not permit LIFO for external reporting.

  1. AIt can produce closing inventory values that are out of date and unrepresentative of current costCorrect
  2. BIt always results in higher reported profit than FIFO
  3. CIt requires physical inventory to be issued newest first
  4. DIt cannot be applied when prices are stable

Explanation

LIFO leaves the oldest costs in closing inventory, so the statement of financial position may show values far from current cost. It does not always give higher profit; in rising prices it gives lower profit than FIFO. Costing methods are assumptions and need not match physical flow.

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