di dolly. How should me change of mentory valuation basis be accounted for? (5 marks) QUESTION THREE (10 marks) Villandry's inventory includes three items for which the following details are available. Supplier's list pass Shs. w ka Net realisable value Shs. 5,100 2,800 4,100 Product A Product B Product C 3,600 4,200 The company receives a 24% trade discount from its suppliers and it also takes advantage of a 2% discount for prompt payment. Required: (a) Calculate the total value of products A, B and C which should be shown in inventory in the statement of financial position. (b) Explain the difference that changing from a weighted average to FIFO method of inventory valuation is likely to have entity's profit or loss. (10 marks) O

Villandry

Inventory Valuation:

a) The total value of products A, B, and C shown in inventory in the statement of financial position is:

$8,844

b) Difference and Effect of Weighted Average and FIFO Methods on Profit or Loss:

Villandry's FIFO method of valuing the cost of goods sold and ending inventory is based on the assumption that goods that are purchased first will be the first to be sold.  With this assumption, the ending inventory always reflects the newest prices, while the cost of goods sold reflects the older prices.  On the other hand, the weighted average method calculates the cost of goods sold and the ending inventory based on an average price.  It divides the cost of goods available for sale by the quantity of goods available for sale.  The average value obtained is then applied to compute the cost of goods sold and the ending inventory.  What the weighted average method achieves is to even out the unit cost of inventory.

Therefore, they do not produce the same result.  When prices are rising, as the FIFO method reflects more accurately the values of the cost of goods sold and ending inventory than the weighted average, it will also report higher profits or lower losses than the weighted average.  The weighted average does not show such fluctuations.

Explanation:

a) Data and Calculations:

               Net realisable   List price value  Purchase cost    Inventory Value

                          Shs.                Shs.           Shs (list price -24%)      Shs

Product A         3,600            5,100                  3,876                     3,600

Product B         2,900           2,800                  2,128                       2128

Product C        4,200             4,100                   3,116                       3,116

Total cost       10,700           12,000                 9,120                       8,844

b) The purchase costs are computed by deducting 24% trade discount from the suppliers' list prices.  For example, for the total list price, taking away 24% trade discount will reduce the cost to $9,120 ($12,000 * 0.76).  This purchase cost is then compared with the net realizable value to determine the inventory value for each product.

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