Final Exam Sem May 2013 (Inventory Valuation)

The following inventory information is taken from Kaka Tradings store for January 2013:

Jan Purchases Jan Sales
Unit RM Unit
1 50 3.00 4 70
3 100 3.15 10 100
6 120 3.25 29 170
23 100 3.40
31 50 3.50
Total 420 Total 340

The business uses perpetual inventory system. During the month of January, the business
sold 340 units at the price of RM4.00 per unit.

Using the First In First Out (FIFO) and Weighted Average methods, you are required to:
i) prepare appropriate tables to show the movement of inventory
(10)
ii) show the effects on profit and loss
(8)

ii) Based on your above analysis, explain which inventory valuation method should
Kaka Trading use. Justify.

Answer:
i) The movement of inventory:
First In First Out (FIFO) method
Date Purchase at Cost
Value (RM)
Sales
Quantity
(unit)
Sales at Cost Value Balance (Value of
Ending Inventory)
1/1 50@ RM3.00
3/1 100 @ RM3.15 50 @ RM3.00
100@RM 3.15
4/1 70 50 @ RM3.00
20 @ RM 3.15
80 @ RM3.15
6/1 120@ RM3.25 600 @ RM4.70 80 @ RM3.15
120 @ RM3.25
10/1 100 80 @ RM3.15
20 @ RM3.25
100 @ RM3.25
23/1 100 @ RM3.40 100 @ RM3.25
100 @ RM3.40
29/1 170 100 @ RM 3.25
70 @ RM 3.40
30 @ RM 3.40
30/1 50 @ RM 3.50

30 @ RM3.40
50 @ RM 3.50

Weighted Average
Date Purchase at Cost
Value (RM)
Sales
Quantity
(unit)
Sales at Cost Value Balance (Value of
Ending Inventory)
1/1 50@ RM3.00
3/1 100 @ RM3.15 (50 @ RM3.00) +
100 @ RM 3.15
= RM 150 + RM
315
50 + 100
= RM 465
150
= RM 3.10
150 @ RM3.10
4/1 70 @ RM
3.10
80 @ RM3.10
6/1 120@ RM3.25 (80 @ RM3.10) +
120 @ RM 3.25
= RM 248 + RM
390
80 + 120
= RM 638
200
= RM 3.19
200 @ RM3.19

10/1 100 @ RM
3.19
100 @ RM3.19
23/1 100 @ RM3.40 (100 @ RM3.19) +
100 @ RM 3.40
= RM 319 + RM
340
100 + 100
= RM 659
200
= RM 3.30
200 @ RM3.30
29/1 170 @ RM
3.30
30 @ RM 3.30
30/1 50 @ RM 3.50 (30 @ RM3.30) +
50 @ RM 3.50
= RM 99 + RM 175
30 + 50
= RM 274
80
= RM 3.43
80 @ RM3.43

ii) effects on profit or loss:
Cost Of Goods Sold (COGS):
FIFO = (50 @ RM3.00) + (20 @ RM 3.15) +
(80 @ RM 3.15) + (20 @ RM 3.25) +
(100 @ RM 3.25) +( 70 @ RM 3.40)
= RM 1,093
Weighted Average = (70 @ RM3.10) + (100 @ RM 3.19) +
(170 @ RM 3.30)
= RM 1,097

Gross profit:
FIFO = Sales COGS
= (340 x RM 4.00) RM 1,093
= RM 1,360 RM 1,093
= RM 267

Weighted Average = Sales COGS
= (340 x RM 4.00) RM 1,097
= RM 1,360 RM 1,097
= RM 263

iii)
FIFO method
Cost Of Goods Sold under FIFO method is lower compared to the Weighted
Average method. This means that income reported for January would be much
higher, RM267 using the FIFO cost-flow assumptions. FIFO method gives better
profit with the excess amount of RM4.