Kaplan's Mock Exam 2 AP2: Inventory

avalon1163

Hi,

I am currently studying for my AP2 exam with Kaplan and have attempted their Mock Exam. In the 2nd mock, I was presented with the following question:

Bovey Ltd Holds three distinct type of inventory in its warehouse at the end of its accounting year which are valued as follows:

Product Fifo Lifo NRV
i 5000 2500 4000
ii 5500 7900 10000
iii 4700 6200 5000

At what value should inventory be stated in Bovey Ltd's financial statements?

14,200
12,700
11,200
21,200

with 14,200 being the right answer (taken from the figures in bold).

Further, on the answer sheet, the LIFO columns shows the figures and title in red (as opposed to black) and striked through.

Can someone please explain me this answer - if correct. Alternatively, it would be such a relief if someone could confirm that this is a mistake, as I am very much approaching "big headache" zone.

Thank you very much,

Sibylle

janwal

I could be totally wrong but is it because LIFO is not recognised as a method in the IAS 2 so we have been told we will not be asked to calculate any, just know what the difference is between the three.

uknitty

Hi there

Inventory should always be valued at the lower of cost or NRV.

As Jan said - for the purposes of financial statements LIFO is not considered an acceptable method of valuation.
so you need to pick between the lowest figure from the cost ( calculated eiter fifo or avco) and realisable value.

Hope this helps

Jo Clark

Hello Sibylle

There is no mistake as far as I can see. The striking through is due to LIFO no longer being allowed under IAS 2.

Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]

IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.

Therefore, the question in your test requires you to identify the correct value for each product. Product i being 4,000, product ii being 5,500 and product iii being 4,700. All these values are the lower of FIFO or NRV.

I hope this helps.


JC

avalon1163

Good evening again to all here:

Thank you very much for the replies and for taking the time to answer my question.

It is very much appreciated.

Sibylle