Question 2

Sam Jones has just completed his second year in his business - a skateboard retail outlet. He is considering different inventory (stock) valuation methods for his bespoke skateboards. A summary of the purchases and sales for one item of inventory (stock), for the year ending 31 December 2019, is shown below:

Opening Inventory at 01/01/19 8 units at 180 each.

BOUGHT SOLD

January: 8 at 190 each. March: 10 for 290 each.

February: 5 at 200 each. September: 7 for 300 each.

August: 7 at 220 each. December: 2 for 305 each.

October: 9 at 225 each.

Required:

1. Calculate the closing inventory (stock) that would be shown on the Balance Sheet, using the following two methods of valuing inventory (stock).

Show all your workings.

1. FIFO.

2. AVCO.

(12 marks)

2. Draw up the trading account for the year showing the gross profits that would have been reported using each of the two methods.

(5 marks)

3. For each of the two methods calculate the Gross Profit Margin and the Mark-up Percentage.

(3 marks)

4. Using the answers above and in your own words explain the advantages and disadvantages of each of the two methods- FIFO and AVCO. Also there is another method LIFO- does it have any limitations?

(5 marks)

(Total 25 marks)