b) Inventory valuation Doom plc supplies specialist medical equipment. Due to supply shortages, the price of...

  

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b) Inventory valuation Doom plc supplies specialist medical equipment. Due to supply shortages, the price of one piece of equipment which was new on the market this year, has increased substantially during the year ended 31 December 2021. Details on the inventory movements of this component are: Number of Units Cost per Unit (£) Date Transactions Opening balance Bought 7,000 units at £6,000 each Bought 5,600 units at £8,100 each Sold 4,200 units Bought 3,000 units at £9,800 each Sold 3,600 units Sold 2,100 units Closing Inventory 1-Jan-21 7,000 5,600 (4,200) 3,000 (3,600) (2,100) 5,700 £6,000 £8,100 06-Jan-21 08-May-21 06-Jun-21 07-Jul-21 £9,800 03-Sep-21 15-Nov-21 31-Dec-21 The finance director of Doom is under pressure by the Board of Directors to maintain levels of profit for the year ended 31 December 2021. In previous years, the weighted average valuation method (AVCO) was used to value inventory, but the finance director wants to change to first in, first out (FIFO) this year. Required: Explain how FIFO and AVCO valuation methods differ and why these alternative methods are permitted under IAS 2 Inventories. Calculate the inventory valuation at 31 December 2021 using both methods, and hence show the impact on profit of a change from FIFO to AVCO. Discuss whether a change to FIFO is in accordance the Conceptual Framework and ethics (5 marks are available for this discussion). b) Inventory valuation Doom plc supplies specialist medical equipment. Due to supply shortages, the price of one piece of equipment which was new on the market this year, has increased substantially during the year ended 31 December 2021. Details on the inventory movements of this component are: Number of Units Cost per Unit (£) Date Transactions Opening balance Bought 7,000 units at £6,000 each Bought 5,600 units at £8,100 each Sold 4,200 units Bought 3,000 units at £9,800 each Sold 3,600 units Sold 2,100 units Closing Inventory 1-Jan-21 7,000 5,600 (4,200) 3,000 (3,600) (2,100) 5,700 £6,000 £8,100 06-Jan-21 08-May-21 06-Jun-21 07-Jul-21 £9,800 03-Sep-21 15-Nov-21 31-Dec-21 The finance director of Doom is under pressure by the Board of Directors to maintain levels of profit for the year ended 31 December 2021. In previous years, the weighted average valuation method (AVCO) was used to value inventory, but the finance director wants to change to first in, first out (FIFO) this year. Required: Explain how FIFO and AVCO valuation methods differ and why these alternative methods are permitted under IAS 2 Inventories. Calculate the inventory valuation at 31 December 2021 using both methods, and hence show the impact on profit of a change from FIFO to AVCO. Discuss whether a change to FIFO is in accordance the Conceptual Framework and ethics (5 marks are available for this discussion).

Answer rating: 100% (QA)

Answer AVCO Under this method the inventory is valued at weighted average ... View the full answer