Page 25 - Accountancy for Advanced Secondary Schools Teachers Guide Form Five

3 Assessing profit differences: Determine how the different
inventory valuation methods affect the reported profits; identify
significant disparities and their causes (e.g., inflationary
environments, different purchase patterns).
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4. Considering stakeholders: Investors might prefer FIFO for higher
short-term profits or WAM for earnings stability. Creditors may
consider how inventory valuation affects liquidity and solvency
ratios and other stakeholders, and consider how each method
impacts tax liabilities, financial health perception, and stock price.

5. Compiling the analysis: Guide the students when they are
compiling the reports; they need to describe the companies and the
purpose of the analysis. Explain how you obtained and analysed
the financial statements. Also give a detailed comparison of COGS,
ending inventory, and earnings. Further giving explanation of how
FIFO and WAM impact financial figures. Moreover assess the profit
differences through highlighting the disparities and underlying
reasons, discussing potential stakeholder interpretations and
conclude by summarizing the findings and implications for each
company.
Activity 2.3

When asking students to calculate inventory errors, ensure they follow
these steps and considerations:

1. Understand inventory errors: Inventory errors are discrepancies
between actual and recorded inventory due to miscounts, theft,
damage, or accounting mistakes and Errors affect the cost of
goods sold (COGS), net income, and the balance sheet. Overstated
inventory decreases COGS and increases net income, while
understated inventory increases COGS and decreases net income.

Teacher’s Guide Form Five
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23/06/2024 17:45
ACCOUNTANCY_TG_2024_FINAL DUMMY.indd 11
ACCOUNTANCY_TG_2024_FINAL DUMMY.indd 11 23/06/2024 17:45