Non-current Assets
Valuation of Inventory
Questions test your ability to value closing inventory using FIFO and AVCO methods, apply the lower of cost and net realisable value (NRV) rule, and explain the effect of different valuation methods on profit.
Always apply the lower of cost and NRV rule item by item — not to the total inventory. For FIFO, issues come from the oldest batch first. For AVCO, recalculate the weighted average after every new purchase. Show your workings clearly — method marks are available even if the final answer is wrong.
Key Concepts to Revise
FIFO Method
First In, First Out — oldest inventory is issued first. Closing inventory is valued at the most recent purchase prices.
AVCO Method
Weighted Average Cost — a new average is calculated after each purchase. All issues use the current average cost.
Lower of Cost and NRV
Inventory must be valued at whichever is lower — cost or net realisable value. Applied item by item, not in total.
Effect on Profit
Higher closing inventory → higher gross profit. FIFO gives higher closing inventory (and profit) in rising price periods than AVCO.