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Chapter 20

Example 2: Solution

(a) Inventory valuation

1 FIFO basis

With this method of inventory valuation it is assumed that the oldest
items of inventory are sold first, thereby leaving the business entity
with the most recently purchased items. This provides the most
recent valuation for the remaining items of inventory as it uses a
recent purchase price to value the majority of goods.

When INV sells the 7 units on 5 January we assume it sells the
oldest items first. Therefore INV will sell all 5 units of opening
inventory, plus purchased 2 units purchased on 2 January. This
leaves INV with the following items:
$
2 January – 3 units × $4.00 = 12.00
4 January 5 – units × $5.00 = 25.00
6 January 5 – units × $5.50 = 27.50
–––––

Closing inventory cost 64.50
–––––

2 Periodic AVCO basis

With this inventory valuation method, we work out an average cost
per unit based upon the cost of opening inventory plus the cost of
all purchases made during the accounting period as follows:

Average cost per unit: ((5 × $3.50) + (5 × $4.00) + (5 × $5.00) + (5 ×
$5.50))/20 units = $4.50 per unit

Closing inventory cost = 13 units × $4.50 = $58.50

Cost of sales = 7 units × $4.50 = $31.50

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