Inventory quantities, cost flow and an impaired selling price
A fictional trader begins the period with no stock, buys ten identical units at eight currency units each, and later buys another ten at ten each. All units are interchangeable and twelve are sold before the reporting date. The supplied classroom model permits either FIFO or periodic weighted-average cost, and the exercise asks for a comparison rather than a policy change designed to manipulate profit. Eight units remain physically counted in a secure store. New evidence indicates a selling price of nine per remaining unit and a selling cost of one per unit, with no completion cost. The trader has not yet recorded any write-down. A trainee proposes using the selling price itself as inventory value and treating every purchased unit as an expense despite the closing count. No tax, returns or freight costs are supplied.
1. Compute closing stock and cost of sales before the lower-value test under each model.
Read the worked answer
Total purchase cost is 180. FIFO assigns the first ten at 8 and two at 10 to sales, giving cost of sales 100 and closing inventory 80. Periodic weighted average is 180/20 =9 per unit, giving cost of sales 108 and closing inventory 72.
2. Apply the supplied lower-of-cost-and-NRV test and explain the trainee’s mistakes.
Read the worked answer
NRV is 9 −1 =8 per unit, or 64 for the eight units. FIFO requires a 16 write-down from 80; weighted average requires 8 from 72. Both finish at 64 under these facts. Selling price alone omits selling cost, and expensing every purchase ignores the remaining inventory.