Grade 12 Revision Questions Answers
FIFO and LIFO
1.
(a)
Using the information in the table calculate the value of closing stock as at the end of June 2003:
(i)
if the method of valuation is first in, first out (FIFO).
FIFO
Date
Purchases
Quantity Price Value
$
$
Issues/Sales
Balance
Quantity Price Value
$
$
Quantity Price Value
$
$
Opening stock (January)
January
February
March
April
May
140 @ 165
60 @ 162
160 @ 170
60 @ 168
150 @ 173
June
100 @ 170
(ii)
23100
9720
27200
10080
25950
17000
12 @ 156
1872
12 @ 156
74 @ 165
1872
12210
66 @ 165
10890
66 @ 165
27 @ 162
10890
4374
33 @ 162
5346
33 @ 162
77 @ 170
5346
13090
83 @ 170
14110
83 @ 170
25 @ 168
14110
4200
35 @ 168
5880
35 @ 168
90 @ 173
5880
15570
60 @ 173
10380
60 @ 173
86 @ 170
10380
14620
14 @ 170
2380
if the method of valuation is last in, first out (LIFO).
LIFO
Date
Purchases
Quantity Price Value
$
$
Issues/Sales
Balance
Quantity Price Value
$
$
Opening stock (January)
Quantity Price Value
$
$
12 @ 156
1872
January
140 @ 165
23100
86 @ 165
14190
12 @ 156
54 @ 165
1872
8910
February
60 @ 162
9720
60 @ 162
33 @ 165
9720
5445
12 @ 156
21 @ 165
1872
3465
March
160 @ 170
27200
110 @ 170
18700
12 @ 156
21 @ 165
50 @ 170
1872
3465
8500
April
60 @ 168
10080
60 @ 168
48 @ 170
10080
8160
12 @ 156
21 @ 165
2 @ 170
1872
3465
340
May
150 @ 173
25950
125 @ 173
21625
12 @ 156
21 @ 165
1872
3465
June
(i)
100 @ 170
17000
100 @ 170
25 @ 173
2 @ 170
19 @ 165
17000
4325
340
3135
2 @ 170
25 @ 173
340
4325
12 @ 156
2 @ 165
1872
330
2202
N.B. Calculations should be shown for each month.
The layout and working is clear and the calculations are essentially accurate.
[7 to 8 marks]
The calculations contain minor errors. At the top end the layout and workings are clear.
[3 to 6 marks]
There are many inaccuracies and the layout and working are poor. For [1 mark] there must be some
understanding shown.
[1 to 2 marks]
(b)
Calculate the gross profit on the “Slider X6” for the six-month period January to June, using the two
methods of stock valuation.
(3)
FIFO
LIFO
Sales:
668 units @ $220
146960
146960
Opening stock:
Purchases
12 @ 156
1872
113050
114922
2380
112542
1872
113050
114922
2202
112720
34418
34240
Less closing stock
Cost of goods sold
Gross profit
The layout and working is clear and the calculations are accurate.
[3 marks]
There is a maximum of one error. There is logic in the layout.
[2 marks]
There are several errors, but the answer contains some accuracy and logic.
[1 mark]
N.B. Do not double penalize candidates bringing through incorrect figures from part (a).
2.
(a)
Using the FIFO (first in first out) method of stock valuation:
(i)
calculate the value of the closing stock at the end of June 2004.
(Show all your working.)
(6)
Months Stock in/units/
sq m
January
5 000 @ $3
February
March
5 000 @ $4
April
May
5 000 @ $4
June
costs of sales
stock valuation
2 000 @ $3 = $6 000
3 000 @ $3 = $9 000
2 000 @ $3 = $6 000
1 000 @ $3 = $3 000
1 000 @ $4 = $4 000
4 000 @ $4 = $16 000
1 000 @ $4 = $4 000
3 000 @ $4 = $12 000
500 @ $4 = $2 000
2 500 @ $4
5 000 @ $4 = $30 000
500 @ $4 = $2 000
7 000 @ $4 = $28 000
The closing stock = $28 000.
For an accurate answer, which is clearly presented and calculations are clear.
[5 to 6 marks]
For a largely correct answer. Allow for up to two mistakes.
[3 to 4 marks]
For a largely inaccurate answer. The candidate showed only a superficial understanding of the
FIFO method. Answers may be correct, but no working may be shown.
[1 to 2 marks]
(ii)
prepare a profit and loss account for the period January to June 2004.
(Show all your working.)
GP for Trend-Setter Jan–Jun 2004.
Total Revenue
2000 × $20 = $40 000 × 3 = $120 000 1 000 = 50% drop in units sold
1000 × $16 =
$16 000 × 3 = $48 000 $16 = 20% price reduction
$168 000
Costs of sales
Purchased $55 000
Less closing stock $28 000 = $27 000
GP
$141 000
An accurate answer. The trading account is clearly constructed. Working is clear.
[5 marks]
A generally accurate answer. The trading account is not clearly displayed and calculations are
not always shown.
[3 to 4 marks]
For a largely inaccurate answer. The trading account is not presented and calculations are
largely missing.
[1 to 2 marks]
(b)
Explain how the use of the alternative LIFO (last in first out) method of stock valuation will affect
gross profit. (Calculations are not required.)
The LIFO method of stock valuation results in lower closing stock as the older, normally cheaper stock
remains. Lower closing stock figure results in higher cost of sales and therefore lower gross profit.
For an accurate explanation of the relationship between stock valuation method, cost of sales and GP.
[3 marks]
For a less detailed or simplistic explanation of the relationship of the above.
[1 to 2 marks]
3.
(a)
Explain why Suzi Garcia has recommended running the “warehouse as a separate cost centre” (lines
122-123).
•
a cost centre is a section of an organization where the cost of an operation or activity can be
calculated and any variance from the expected cost can be identified
• cost centres can be the basis for deciding the price to be charged for a product, or deciding whether
to continue stocking that product
• individual product performance is clearer
• Suzi is recommending that the creation of a cost centre will improve the cost control of the business
and possibly its cash flow and profit.
There is a clear understanding of cost centres and an explanation of their role in identifying and
allocating costs.
[3 marks]
There is some understanding of cost centres and their role in allocating costs.
[2 marks]
A limited explanation.
[1 mark]
(b)
Using both the FIFO and LIFO methods of stock valuation calculate the following for the first four
months of operation
(i)
the value of closing stock at the end of each month.
FIFO
Month
May
June
Purchases
Issues
6000 @ €3
5000 @ €3.20
July
7000 @ €3.40
August
3000 @ €3.20
3400 @ €3
2600 @ €3
3020 @ €3.2
1980 @ €3.2
5580 @ €3.4
1420 @ €3.4
755 @ €3.2
LIFO
Month
May
June
Purchases
6000 @ €3
5000 @ €3.20
July
7000 @ €3.40
August
3000 @ €3.20
Issues
3400 @ €3
5000 @ €3.2
620 @ €3
7000 @ €.4
560 @ €3
2175 @ €3.2
Stock
Balance
2600 @ €3
1980 @ €3.2
Value
€
7800
6336
1420 @ €3.4
4828
2245 @ €3.2
7184
Stock
Balance
2600 @ €3
1980 @ €3
Value
€
7800
5940
1420 @ €3
4260
825 @ €3.2
1420 @ €3
6900
The figures are laid out clearly and calculations are correct for [8 marks]. Allow up to two
calculation errors for [6 marks] and/or some lack of clarity in layout.
[6 to 8 marks]
There are several errors and/or omissions, but the layout shows that the candidate understands
the main principles of the two methods.
[3 to 5 marks]
There is some attempt to layout stock, but there are many errors and/or omissions.
[1 to 2 marks]
(ii)
the gross profit for the period May to August.
Sales value
May to July
August
Total
18 000 × €12
3 000 × €10
Cost of sales
FIFO
3 400
@ €3
2 600
@ €3
3 020
@ €3.2
1 980
@ €3.2
5 580
@ €3.4
1 420
@ €3.4
755
@ €3.2
Total
€
= 10 200
= 7 800
= 9 664
= 6 336
= 18 972
= 4 828
= 2 416
60 216
LIFO
3 400
5 000
620
7 000
560
2 175
Total
€
= 10 200
= 16 000
= 1 860
= 23 800
= 1 680
= 6 960
60 500
@ €3
@ €3.2
@ €3
@ €3.4
@ €3
@ €3.2
=
=
€
216 000
30 000
246 000
Gross profit
FIFO
€
LIFO
€
Sales
less cost of goods sold
246 000
60 216
246 000
60 500
Gross Profit
185 784
185 500
There is a clear understanding of the layout of a trading account and how gross profit is calculated.
Working is shown, and the profit and loss account is calculated correctly.
[5 marks]
There is some understanding of the layout of a trading account, but may include errors in both layout and
calculation.
[3 to 4 marks]
There are many omissions and miscalculations, but a small measure of understanding about layout, with
some attempt at calculation.
[1 to 2 marks]
(c)
Compare FIFO and LIFO as methods of stock valuation for Gadgets2u.com.
FIFO is realistic as it is based on the assumption that issues are made in order of the goods being received. The
costs are therefore based on the prices paid. Closing stock is based on most recent prices. In a time of rising
prices, it may overstate profit as it gives a lower cost of sales figure based on historic pricing.
LIFO is based on the prices paid. Issues are calculated at the most recent prices. It may be considered unrealistic
as it is based on the assumption that issues are from the latest stock. Closing stock is not based on the most recent
prices.
A good understanding of the two valuation methods, with clear comparison.
[4 marks]
A reasonable understanding of the two valuation methods, with perhaps limited comparison.
[2 to 3 marks]
A limited understanding.
[1 mark]