Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Inventory valuation: Inventory valuation methods: First In First Out (FIFO): Example Question

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The Solution

  • Under FIFO it is assumed the first items bought are sold first
DateReceiptsSalesBalance
UnitsUnit Cost ($)Total Cost($)UnitsUnit Cost($)Total Cost($)UnitsUnit Cost ($)Total Cost($)
Op/Bal5030.001 500
Jan 83030.009002030.00600
Jan 1010030.003 00012030.003 600
Jan 128030.002 4004030.001 200
Jan 2112030.504030.001 200
12030.50

3 660

4 860
Jan 284030.001 2007030.502 135

50

30.50

50

-

-

-

901 525702 135
Feb 15030.50 1 5252030.50610
Feb 1415031.004 6502030.50610

150

31.00

4 650

1705 260
Feb 232030.506107031.002 170

80

31.00

2 480

-

-

-

1003 090702 170
Mar 13031.009304031.00860
Mar 412031.503 7804031.00860

120

31.50

3 780

1604 640
Mar 194031.008604031.501 260

80

31.50

2 520

-

-

-

1203 380401 260
Mar 2310032.003 2004031.501 260

100

32.00

3 200

1404 460
Mar 274031.501 2602032.00640

80

32.00

2 560

-

-

-

1203 82020640
  • Since these are the only transactions that took place according to the question
  • On 31 March 20×8 the inventory balance would be:
  • 20 units @ $32 per unit this translates to:
  • $640
  • Here we have shown detailed workings so that you can have a better picture of how we have arrived at the final figure
  • Unless the number of marks allocated or the question dictates that you do this you should use a simpler method:
    1. Add all the units all the items bought(including opening inventory) in the period in this case: (100+120+150+120+100)= 640
    2. Add all the units that were sold or issued (30+80+90+50+100+30+120+120)=620
    3. Subtract issues/sales from total inventory available during the period i.e. 640-620
    4. Now multiply this by the latest purchase price i.e 20×32=640
  • NB If the closing inventory in units is more than the last batch bought then the inventory then you need to use the previous price points until the balance is satisified
  • For example let’s say in this case the balance had been 200 units instead
  • Then the cost of closing inventory would be:
  • (100×32.00)+(100×31.5)=6 350
  • NB When inventory is being used up instead of being sold then the word Sales in the workings table is replaced by the word Issues

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