BBA - II SEMESTER (FINANCIAL AND MANAGEMENT ACCOUNTING-II) Unit - I FIFO method , LIFO method , Simple Average Method , Weighted Average Method ?

Accounting for the valuation of inventories is a critical aspect of financial reporting and management accounting. The valuation of inventories involves determining the cost of goods held for sale, raw materials, work-in-progress, and finished goods.

There are several methods used for valuing inventories, including the first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average cost methods. Under the FIFO method, the first items purchased are considered the first ones sold, while under the LIFO method, the last items purchased are considered the first ones sold. The weighted average cost method takes into account the average cost of all items held in inventory.

Once the inventory is valued, it is recorded as an asset on the company's balance sheet. The cost of the inventory is debited to the inventory account, and a corresponding credit is made to the accounts payable or cash account, depending on whether the inventory was purchased on credit or paid for in cash.

It is important for companies to accurately value their inventories as it can affect the company's financial statements and tax liabilities. Inaccurate valuations can lead to overstatement or understatement of income and taxes. As a result, companies must carefully monitor their inventory levels and valuation methods to ensure accurate reporting.


Here are some multiple-choice questions related to the topic of accounting for assets of valuation of inventories:

  1. What is the inventory turnover ratio? a. The number of times inventory is sold and replaced in a given period b. The amount of inventory on hand at the end of the period c. The cost of goods sold divided by the average inventory

Answer: c. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory, and it measures how quickly a company is selling its inventory.

  1. Which inventory valuation method assumes that the first items purchased are the first ones sold? a. FIFO b. LIFO c. Weighted average cost

Answer: a. The first-in, first-out (FIFO) method assumes that the first items purchased are the first ones sold.

  1. Which of the following methods of inventory valuation is not allowed under International Financial Reporting Standards (IFRS)? a. FIFO b. LIFO c. Specific identification

Answer: b. The last-in, first-out (LIFO) method is not allowed under IFRS.

  1. Which of the following is true about the lower of cost or market (LCM) rule? a. It requires companies to value their inventory at the lower of cost or net realizable value. b. It requires companies to value their inventory at the lower of cost or gross profit margin. c. It is not a generally accepted accounting principle.

Answer: a. The lower of cost or market (LCM) rule requires companies to value their inventory at the lower of cost or net realizable value, which is the estimated selling price less the cost of completion and disposal.

  1. How does the choice of inventory valuation method affect the balance sheet and income statement? a. It only affects the balance sheet. b. It only affects the income statement. c. It affects both the balance sheet and income statement.

Answer: c. The choice of inventory valuation method affects both the balance sheet and income statement. It affects the balance sheet by changing the value of inventory, and it affects the income statement by changing the cost of goods sold and gross profit margin. 

FIFO stands for "First In, First Out" and it is a method used for inventory management to determine the cost of goods sold (COGS) and the value of the ending inventory. The FIFO method assumes that the first items purchased or produced are the first items sold or used, while the most recent items purchased or produced remain in inventory.

LIFO, or Last-In, First-Out, is a method of valuing inventory where the most recently acquired items are assumed to be sold first. Under LIFO, the cost of goods sold (COGS) is calculated by using the cost of the most recently purchased items to match against revenue. The cost of goods sold represents the cost of the inventory that was sold during a specific accounting period, while the remaining inventory on hand is valued at the cost of the oldest items still in inventory.

The Weighted Average Method is a method of valuing inventory where the cost of goods sold (COGS) and ending inventory are calculated based on the weighted average cost per unit of all the units available for sale during a specific accounting period.

Under the weighted average method, the total cost of the units available for sale during a period is divided by the total number of units available for sale to determine the weighted average cost per unit. This weighted average cost per unit is then used to calculate the cost of goods sold and the value of the ending inventory.

The Simple Average Method is a method of valuing inventory where the cost of goods sold (COGS) and ending inventory are calculated based on the average cost per unit of all the units available for sale during a specific accounting period.

Under the simple average method, the total cost of all the units available for sale during a period is divided by the total number of units available for sale to determine the average cost per unit. This average cost per unit is then used to calculate the cost of goods sold and the value of the ending inventory.


Here are some multiple-choice questions on inventory valuation methods:

  1. Which inventory valuation method assumes that the oldest items in inventory are sold first? a) LIFO b) FIFO c) Simple average method d) Weighted average method

Answer: b) FIFO

  1. Which inventory valuation method results in the highest cost of goods sold during a period of rising prices? a) LIFO b) FIFO c) Simple average method d) Weighted average method

Answer: a) LIFO

  1. Which inventory valuation method calculates the cost of goods sold and ending inventory based on the average cost per unit of all the units available for sale during a period? a) LIFO b) FIFO c) Simple average method d) Weighted average method

Answer: c) Simple average method

  1. Which inventory valuation method calculates the cost of goods sold and ending inventory based on the weighted average cost per unit of all the units available for sale during a period? a) LIFO b) FIFO c) Simple average method d) Weighted average method

Answer: d) Weighted average method


5. _________ method is logical.
a) LIFO
b) FIFO
c) Average
d) None of the above

Ans. FIFO

6. Under __________ method cost of goods sold represents cost of earlier purchases.
a) Simple Average
b) Weighted Average
c) LIFO
d) FIFO

Ans. FIFO

7. Under _________ method cost of goods sold represents cost of recent purchases.
a) LIFO
b) FIFO
c) Average
d) None of the above

Ans. LIFO

8.. Under rising prices higher income is reported under _________ method.
a) LIFO
b) Simple Average
c) Weighted Average
d) FIFO

Ans. FIFO

9. Under rising prices lower income is reported under __________ method.
a) LIFO
b) FIFO
c) Weighted Average
d) None of the above

Ans. LIFO

10. __________ method is advantageously used in process industries.
a) W.A.
b) Simple Average
c) LIFO
d) FIFO

ANs. W.A.

11. Stores Department maintains a record in which a separate folio is maintained for each item _______ .
a) Stores Ledger
b) Bin Card
c) Stock Register
d) Bill of Materials

Ans. Stores Ledger

12. FIFO method is :
a) Logical
b) Illogical
c) Recognised by AS2
d) both a & c

Ans. both a & c

13. Under perpetual Inventory system stock is ascertained :
a) Periodically
b) Continuously
c) At the end of the year
d) None of the above

Ans. Continuously

14. Issue of material under ___________ method is from oldest lots.
a) FIFO
b) LIFO
c) Average
d) None of the above

Answer:  FIFO.



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