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values, different inventory valuation methods will yield different impacts on the value
of the ending inventory reported in the statement of financial position. Let us examine
these key issues within a context of rising prices:
(a) FIFO: As the ending inventory is based on the prices of the most recent purchases,
this method will result in a higher reported inventory value on the statement of
financial position during a period of rising prices. This indicates a more favourable
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financial position, especially when assessed based on the quality of current assets.
(b) LIFO: As the value of ending inventory is based on the prices of the oldest inventory,
LIFO will result in a lower reported inventory value on the statement of financial
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position during a period of rising prices. Compared to FIFO, LIFO will show a
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relatively unfavourable financial position.
(c) WAM: Again, due to the fact that this method averages out the cost of inventories, the
value of ending inventory will be somewhere between FIFO and LIFO. Specifically,
it will be higher than LIFO (which uses the lower cost of older inventory) and
lower than FIFO (which uses the higher cost of the most recent inventory) resulting
into inventory value and reported financial position that are also between those
calculated under FIFO and LIFO.

These differences can have significant implications for a firm’s financial statements and
tax liabilities, making the choice of inventory valuation method a strategic decision for
management. Thus, it is important for the entity to select and consistency apply the
inventory method that will result in financial statements presenting a true and fair view
of the entity’s financial performance and financial position.

Example 2.3
Using the data provided in Examples 2.2 and 2.3, conduct a comparative analysis
of the profits derived under the three inventory valuation methods (FIFO, LIFO and
WAM).

Solution 2.3
(a) A comparison between FIFO, LIFO and WA M in periodic inventory–taking

system
The effect of inventory valuation methods on the financial statements under three different
methods discussed so far can be presented as follows:

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