V.O. Lynn commences business on 1 January buying and selling musical instruments.

She sells two standard types, violas and cellos, and her transactions for the year are as set out in Table 10.9 (all prices are in euros).

You are aware that the cost to V.O. Lynn of the instruments is changed on 1 April, 1 July and 1 October, but will not change again until 1 January following.

a. Prepare a statement showing gross profit and closing inventory valuation, separately for each type of instrument, under each of the following assumptions:
i. FIFO;
ii. LIFO;
iii. weighted average (separately for each transaction);
iv. replacement cost (assuming that this is equivalent to the most recent price).

b. At a time of rising prices (i.e. using the cellos as an example), comment on the usefulness of each of the methods.

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Table 10.9 Sale/purchase transactions for V.O. Lynn Violas Cellos Sell Buy Sell Buy 1 January 31 March 2 at 400 2 at 600 1 at 600 30 April 1 at 350 1 at 700 30 June 1 at 600 1 at 1,000 31 July 2 at 300 1 at 800 30 September 3 at 500 2 at 1,100 30 November 1 at 250 1 at 900