MGT401 GDB 2 Solution 20th January 2016

Graded Discussion Board 02
Financial Accounting II (MGT401)

Topic: Valuation of Inventory
XYZ Ltd. is a manufacturer of readymade garments. Company’s accounts officer has suggested the management to change its accounting policy relating to inventory valuation method from weighted-average cost method (WAC) to first-in first-out (FIFO). It was considered that FIFO method reflects the usage of inventory more accurately in response of economic cycle.
Accounts officer has determined following differences, if company changes its inventory valuation method from weightage average method to first-in, first-out method.

Weighted Average Method (Rs.)
First-in, First-out (Rs.)
Inventory at 1st January 2013
25,000
22,000
Inventory at 31st December 2013
36.000
30,000
Inventory at 31st December 2014
48,000
50,000
Inventory at 31st December 2015
64,000
70,000

Requirement:
a) On the basis of given data, you are required to mention that what will be the effect of change in inventory valuation method by filling the table given below.

Year
Particulars
Effect on Cost of Goods Sold
(simply mention that whether it will increase or decrease)
Effect on Profit
(simply mention that whether it will increase or decrease)
2013
Change in Opening Inventory


2013
Change in Closing Inventory


2014
Change in Closing Inventory


2015
Change in Closing Inventory