Paper 3 · Inventory valuation
Which of the following is an advantage of the FIFO (First In, First Out) method of inventory valuation, compared with AVCO (weighted average cost)?
AClosing inventory is valued at the most recent purchase prices, giving a more realistic figure in the statement of financial position.
BIt always eliminates the effect of price fluctuations on the reported profit for the year completely.
CIt calculates a brand new average cost figure after every single purchase, making it simple to apply consistently.
DIt is required by international accounting standards, which do not permit companies to use AVCO at all in a set of published financial statements.
Explanation: FIFO assumes the oldest costs are used up first, so what remains in closing inventory is valued at the most recent (current) purchase prices, giving a more realistic statement of financial position figure than an averaged cost.
Derived from ZIMSEC Accounting Paper 3, June 2019, Q3
