Question

4 (a) Afnan Traders makes the following purchases and issues during the month of

         November 2019

                                                                          FIFO METHOD

Date 2019	Transactions	Quantity UNITS	Per Unit OMR
1	Inventory Beginning	100	10
5	Purchases	200	11
9	Purchases	300	12
16	Sales	550	-
26                                           \	Purchases	400	13
31	Sales	250	-

REQUIRED:

Determine the (a) Cost of Ending Merchandise Inventory, (b) The Cost of Goods Sold

under Perpetual Inventory System by FIFO Method                                                             

Answer 4(a):                                                Afnan Traders

         FIFO (Perpetual)

Date 2019 Nov.	PURCHASES			SALES			BALANCE
	Quantity	Rate (OMR)	Amount (OMR)	Quantity	Rate (OMR)	Amount (OMR)	Quantity	Rate (OMR)	Amount (OMR)

(a) Cost of Ending Merchandise Inventory =

(b) The Cost of Goods Sold =

4 (b) While making valuation of inventory of a manufacturing company, how would you choose

          between methods of inventory valuation (FIFO or LIFO) for ending inventory and cost of

          goods sold? Is it possible for you to change the method whenever you want, discuss.           

Answer 1

	Working Notes: Computation of Closing Stock anf Cost of goods sold
Date	Particulars	Qty	Rate	Amt(OMR)	Date	Particulars	Qty	Rate	Amt(OMR)
1-Nov	Opening Inventory	100	10	1000			100	10	1000
05-Nov	Purchases	200	11	2200			200	11	2200
09-Nov	Purchases	300	12	3600			250	12	3000
16-Nov	Purchases	400	13	5200	16-Nov	Sale	550		6200
					26-Nov	Sale	50	12	600
							300	23	2600
									3200
					31 Nov	Closing Stock	200	13	2600
	Total			12000		Total			12000

Method used - FIFO

Answer to 1 a)

Cost of Ending Inventory = OMR 2600 (Calculated in Working table)

Answer to 1 b)

Cost of good sold = OMR 6200 + OMR 3200

= OMR 9400

.......................................................................................................................................................................................

Answer to Question 4 b)

While making making valuation of inventory of a manufacturing company it is important to check the current economic prospect of the sector in which it is operating. If there is inflation, it is better to apply LIFO as increasing prices will lead to higher cost of goods sold thereby reducing profits of Company in books resulting in lower tax burden. Further , Closing Inventory will be grossly understated because of application of LIFO.

However, if there is recession or deteriorating market conditions ,it is better to apply FIFO as decreasing prices will lead to lower cost of goods sold thereby reducing profits of Company in books resulting in lower tax burden. Closing Inventory will be fairly priced most of the times.

It is not possible to change the method of Inventory whenever wec want. Change in method of Inventory is a change in Accounting Policy and can be effected only if such change is required for Compliance of Accounting Standards or for compliance with law, statute or for better presentation of Accounts