JAMB UTME - Principles of Accounts - 2008

In a period of inflation, which of the following method normally gives a closing closing stock?

FIFO

LIFO

Sinple average

periodic simple average

Antwoorddetails

In a period of inflation, the FIFO (First In First Out) method normally gives a closing stock. This is because the FIFO method assumes that the goods that were purchased or produced first are also the first ones to be sold. In a period of rising prices, this method results in a lower cost of goods sold and a higher value of ending inventory. This is because the older, cheaper inventory is sold first, and the newer, more expensive inventory remains in the ending inventory. For example, let's say a company purchased 100 units of a product at $10 each at the beginning of the month and then purchased another 100 units of the same product at $15 each later in the month. If the company sells 150 units during the month, the FIFO method assumes that the first 100 units sold were the ones purchased at $10 each, and the remaining 50 units sold were the ones purchased at $15 each. This results in a lower cost of goods sold and a higher value of ending inventory, which can be beneficial in a period of inflation. Therefore, in a period of inflation, the FIFO method is preferred over the LIFO (Last In First Out) method, which assumes that the goods that were purchased or produced last are the first ones to be sold. The LIFO method results in a higher cost of goods sold and a lower value of ending inventory, which can be disadvantageous in a period of rising prices.

Uju Nig. Ltd. Balance Sheet (Extract)
	₦		₦
Capital	200,000	Land and building	250,000
Net profit	50,000	Stock	20,000
5% debenture	100,000	Debtors	50,000
Creditors	80,000	Bank	10,000
	430,000		430,000

Departmental Trading Account (Extract)
	Total (₦)	P (₦)	Q (₦)		Total (₦)	P (₦)	Q (₦)
Stock	3,000	2,000	1,000	Sales	10,000	6,000	4,000
Purchases	4,000	2,500	1,500	Closing stock	2,000	1,500	500






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