MGT 101 GDB solution 2016 updated

MGT 101 GDB solution 2016

Topic to be tested:

•         Methods of Inventory Valuation

Learning Objectives:

•         To develop an understanding about FIFO and LIFO methods of inventory valuation.

•         To understand the practical implication of inventory valuation and its impact on financial statements.

Discussion Question:

ABC Enterprise presents the following information relating to operations:

                            

Inventories – opening	10 Units @ Rs. 100 per Unit
Purchases on July 12, 2016	05 Units @ Rs. 120 per Unit
Sales on July 15, 2016	12 Units @ Rs. 150 per Unit

Required:

1.        What would be the cost of closing inventory as on July 16, 2016 to be reported in balance sheet by using following methods of inventory valuation?

a.        FIFO

b.        LIFO

2.        Which method of inventory valuation is NOT recommended by International Accounting Standards (IAS) for presenting the value of inventory in financial statements?

3.        Give valid arguments in favor of method NOT recommended by IAS for presenting the value of inventory in balance sheet.

Ans:

 Cost of closing inventory as on July 16, 2016

Under FIFO Method

3 UNITS REMAIN IN STOCK @ Rs. 120 per Unit

So value of stock is 120 * 3 = Rs 360

Under LIFO Method

3 UNITS REMAIN IN STOCK @ Rs. 100 per Unit

So value of stock is 100 * 3 = Rs 300

Ans 2 :

LIFO method is not recommended in IAS 2, for presenting the value of inventory in financial statements

Ans 3 :

 following reasons:

The LIFO method treats the newest items of inventory as being sold first, and consequently the items remaining in inventory are recognized as if they were the oldest. This is generally not a reliable representation of actual inventory flows.

 Because of inflation, where costs and expenses continue to rise, LIFO will have a lower profit margin than that of FIFO. This is because there is little to no inflation gap to allow LIFO businesses to capitalize on their inventory.

 Because of LIFO’s generally lower reported profits, businesses utilizing this valuation of inventory can have a harder time finding investors. Individuals and businesses looking to invest their money are usually looking for companies that show substantial profit growth over a period of time. With LIFO, profits will rise with inflation but they will not reflect the kind of healthy business investors are seeking.

Due to the complexities of LIFO , accountants can have a difficult time accurately recording costs and expenses. This is especially true of large businesses that have many operations that implement different inventory management techniques.