Page 55 - Accountancy_F5

FIFO LIFO WAM
Details
TZS TZS TZS
Sales 9,000,000 9,000,000 9,000,000
Less: Cost of sales (7,376,000) (7,456,000) (7,424,000)

Gross profit 1,624,000 1,544,000 1,576,000
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(a) FIFO: During periods of rising prices, the FIFO method results in a higher
profit compared to the LIFO and WAM methods. This is because the closing
inventory is assigned higher values of the most recent purchases. As a result,
the cost of sales is lower, leading to a higher gross profit.
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(b) LIFO: In contrast, the LIFO method results in a lower profit during periods
of rising prices. This is because the cost of sales is calculated using the cost of
the most recently purchased items, which are higher. Consequently, the cost
of sales is higher, leading to a lower gross profit.

(c) WAM: The WAM method falls somewhere in between FIFO and LIFO. The
cost of sales and closing inventory are based on the average cost of all items
available for sale during the period, regardless of when they were purchased.
Therefore, the profit reported under WAM will be between that of FIFO and
LIFO.

(b) A comparison between FIFO, LIFO and WA M in t h e perpetual inventory-
taking system

FIFO LIFO Weighted average cost
Details
TZS TZS TZS
Sales 9,000,000 9,000,000 9,000,000
Less: Cost of sales (7,376,000) (7,450,000) (7,396,658)
Gross profit 1,624,000 1,550,000 1,603,342

(a) FIFO: The FIFO method continues to result in a higher profit during periods
of rising prices, as the closing inventory is valued at the most recent, higher
prices. The value of closing inventory, cost of sales, and profit remain the same
under both periodic and perpetual systems when using FIFO.
(b) LIFO: Under the LIFO method in a perpetual system, the inventory balance
is updated continuously. When a sale occurs, the cost of the sale is calculated
based on the cost of the most recently purchased items, and the inventory is
reduced accordingly. This results in a lower gross profit compared to FIFO
and WAM.

Student’s Book Form Five
42

23/06/2024 17:34
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ACCOUNTANCY_DUMMY_23 JUNE.indd 42 23/06/2024 17:34