A business holds the following movements for one product: opening inventory 100 units at £5, then purchases of 200 units at £6 and 150 units at £7. In the period 320 units are sold. Using the FIFO method, what is the value of closing inventory?
Answer and explanation
Correct answer: A. £910
- Step 1: Units available = 100 + 200 + 150 = 450, so closing units = 450 − 320 = 130.
- Step 2: FIFO assumes the oldest units are sold first: 100 + 200 = 300 units are used up, then 20 of the 150 units at £7.
- Step 3: The 130 units left all come from the last purchase: 130 × £7 = £910.
Answer
£910.
Why not the others: £680: This values the 130 remaining units at the oldest costs, which is LIFO, and IAS 2 does not permit LIFO. £794: This uses the weighted average cost per unit, so it is the AVCO answer and not FIFO. £780: This values all the remaining units at the middle purchase price, but FIFO leaves the latest purchases in inventory.
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