If inventory costs remain relatively constant from period to period, which inventory method is the most appropriate one in the allocation of cost flow between COGS and inventory carrying value? I. Specific identification method. II. FIFO. III. Weighted average method. IV. LIFO. I am stuck with given choices… I think its not I and for other three choices as per my understandings if prices are contant, it does nt make any difference if you choose II, III or IV as they all give same results. Please elaborate if you have some good explanation
That is a good one. I would say weighted avg because the words ‘relatively constant’ were used and the weighted avg method would also keep COGS relatively constant.
I would think the answer is FIFO for a couple of reasons. You can strike I and IV pretty easily. Specific ID doesn’t make sense given the question and I would be hesitant to put LIFO because it isn’t allowed under IFRS (I know the question doesn’t specifically say it, but still). I think that CFAI loves FIFO, unless you have a good reason to choose another way. It also matches ending inventory closest to replacement value.
misswallstreet Wrote: ------------------------------------------------------- > That is a good one. I would say weighted avg > because the words ‘relatively constant’ were used > and the weighted avg method would also keep COGS > relatively constant. +1
I think its FIFO
If inventory costs remains relatively constant, then it’s weighted avg method. If not, then you use the method that will allocate the most recent cost to COGS, which is LIFO for Income Statement which will allocate most recent cost to COGS & FIFO for Balance Sheet which will allocate the most cost to ending Inventory.
FIFO kiddos, closest to reality
While they’ll all give you the same COGS, FIFO prices the remaining inventory with the most current prices.
Question regarding the valuation allowance for inventory P.393 in book 3 1.How does the a company derive with the figure in that account? 2.Is it an account listed on the balance sheet? 3.When Mark down does occure, is it expensed then shifted into the account? 4.How does the process work? Im a little confused with regards to this part of inventory, any help would be much appreciated.
Baycap Wrote: ------------------------------------------------------- > Question regarding the valuation allowance for > inventory P.393 in book 3 > > 1.How does the a company derive with the figure in > that account? Look at Exhibit 3. Ending balance 2007 514 + impact of writedowns in 2008 = 654 BS allowance. For details pg 394 note 19B > 2.Is it an account listed on the balance sheet? I think some report net of valuation or some report gross with allowance is in the case of P&M on B/S with accumulated depreciation. IN this case it is net with details provided in footnotes > 3.When Mark down does occure, is it expensed then > shifted into the account? It is charged to cost of sales and the equivalent amount goes to valuation reserve/allowance > 4.How does the process work? Unsure as to what you are asking. In general, inventories are evaluated annually for impairment and depending upon IFRS or GAAP reporting valuations are net realizable value or lower of cost or market value, with appropriate adjustments to income statement & B/S Hope this helps > > Im a little confused with regards to this part of > inventory, any help would be much appreciated.
1BigStud - I think you mean FIFO makes the balance sheet closest to reality (but distorts cogs on the income statement.) LIFO is the “closest to reality” when looking at COGS. 1BigStud Wrote: ------------------------------------------------------- > FIFO kiddos, closest to reality
FIFO won’t distort COGS if costs are stable, which is what is said in this question. turbolt Wrote: ------------------------------------------------------- > 1BigStud - I think you mean FIFO makes the balance > sheet closest to reality (but distorts cogs on the > income statement.) LIFO is the “closest to > reality” when looking at COGS.
Regarding the first question: Specific identification method. Isn’t it the most precise method of the cost flow allocation?
You are correct. But that method is unrealistic. But that could make a good “trick” question. Deimon Wrote: ------------------------------------------------------- > Regarding the first question: Specific > identification method. Isn’t it the most precise > method of the cost flow allocation?