A business trades in a single product. The following transactions took place during January 2025. Date Transaction Units Cost per unit $ 1 Jan Opening inven...
Question 1 Report
A business trades in a single product. The following transactions took place during January 2025.
| Date | Transaction | Units | Cost per unit $ |
|---|---|---|---|
| 1 Jan | Opening inventory | 200 | 8.00 |
| 6 Jan | Purchased | 300 | 8.50 |
| 10 Jan | Sold | 350 | |
| 15 Jan | Purchased | 250 | 9.00 |
| 22 Jan | Sold | 200 | |
| 28 Jan | Purchased | 100 | 9.50 |
The business uses the FIFO (First In, First Out) method of inventory valuation.
(a) Complete the following inventory record card using the FIFO method.
| Date | Receipts | Issues | Balance | |||
|---|---|---|---|---|---|---|
| Units | Value $ | Units | Value $ | Units | Value $ | |
| 1 Jan | ||||||
[10]
(b) Calculate the value of the closing inventory at 31 January 2025. [3]
(c) Calculate the cost of goods sold for January 2025. [3]
(d) Explain the FIFO method of inventory valuation. [2]
(e) State one advantage of the FIFO method. [2]
Answer Details
(a) FIFO inventory record card
Under the FIFO (First In, First Out) method, the oldest inventory is assumed to be issued (sold) first. The record card tracks receipts, issues, and running balances by cost layer.
| Date | Details | Receipts (Units x $ = Value) | Issues (Units x $ = Value) | Balance (Units, Value $) |
|---|---|---|---|---|
| 1 Jan | Opening balance | 200 @ $8.00 = $1 600 [1] | ||
| 6 Jan | Purchase | 300 @ $8.50 = $2 550 [1] | 200 @ $8.00 + 300 @ $8.50 = 500 units, $4 150 | |
| 10 Jan | Sale (350 units) | 200 @ $8.00 = $1 600 + 150 @ $8.50 = $1 275 [1] Total issue = $2 875 [1] | 150 @ $8.50 = $1 275 [1] | |
| 15 Jan | Purchase | 250 @ $9.00 = $2 250 [1] | 150 @ $8.50 + 250 @ $9.00 = 400 units, $3 525 | |
| 22 Jan | Sale (200 units) | 150 @ $8.50 = $1 275 + 50 @ $9.00 = $450 [1] Total issue = $1 725 [1] | 200 @ $9.00 = $1 800 [1] | |
| 28 Jan | Purchase | 100 @ $9.50 = $950 | 200 @ $9.00 + 100 @ $9.50 = 300 units, $2 750 [1] |
On 10 January, the 350-unit sale draws first from the oldest layer (200 units at $8.00), then from the next layer (150 of the 300 units at $8.50). On 22 January, the 200-unit sale uses the remaining 150 units at $8.50, then 50 units from the $9.00 layer.
(b) Value of closing inventory at 31 January 2025
Closing inventory = 200 x $9.00 + 100 x $9.50 [1]
= $1 800 + $950 [1] = $2 750 [1]
The closing inventory consists of the most recently purchased units, which is characteristic of FIFO.
(c) Cost of goods sold for January 2025
Cost of goods sold = Total issues = $2 875 + $1 725 [1] = $4 600 [1]
Alternatively: Opening inventory ($1 600) + Total purchases ($2 550 + $2 250 + $950 = $5 750) - Closing inventory ($2 750) = $4 600 [1]
(d) Explanation of the FIFO method
Under FIFO, the first (oldest) inventory purchased is assumed to be the first sold or issued. [1] The remaining inventory is therefore valued at the most recent purchase prices. [1]
(e) Advantage of the FIFO method
The closing inventory valuation is close to current market prices or replacement cost, giving a realistic balance sheet figure. [1] It is also a logical method that matches the physical flow of most goods, particularly perishable items. [1]
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