Page 56 - Accountancy_F5

(c) WAM: Under the perpetual system, the WAM method calculates the cost of
sales and closing inventory based on a moving average of the prices during
the entire period. This differs from the periodic system, where it is based on
the average of total purchases and the opening inventory.
In conclusion, the choice of an inventory valuation method can significantly influence
FOR ONLINE READING ONLY
the reported profit. The FIFO method generally results in a higher reported profit during
periods of rising prices, while the LIFO method tends to yield a lower reported profit.
The WAM method usually falls somewhere in between. The choice of method to use
should be consistent, and appropriate for the nature of the business, and importantly, in
compliance with IAS 2.
LANGUAGE EDITING
Activity 2.2
You have been assigned to obtain financial statements for two companies listed in
any stock exchanges in the world (Normally available in stock exchange website)
that both operate in the same industry with different inventory valuation methods of
FIFO and WAM.
Required:

(a) Understand FIFO and WAM: Dive into the concepts of FIFO and WAM to grasp
how these methods impact earnings and why companies opt for one over the
other. LANGUAGE EDITING
(b) Analyse Financial Statements: Examine statements of financial position of the
chosen Company, paying close attention to their earnings. Calculate the cost of
goods sold (COGS) and ending inventory for both companies based on their
respective inventory methods.
(c) Assess Profit Differences: Evaluate how the use of FIFO or WAM affects each
company’s reported earnings and identify any significant disparities.
(d) Consider Stakeholders: Reflect on how investors, creditors, and other stakeholders
might interpret the differences in earnings between the two companies.
Compile your analysis into a comprehensive report.

Exercise 2.1

1. Inventory and purchasing data held by Hekima Company, for the year 2023, was
as follows:
Units TZS
1 January 2023 Opening inventory 200 2,000
st
15 April 2023 Purchases 500 2,200
th
10 July 2023 Purchases 750 2,400
th
1 October 2023 Purchases 900 2,600
st
31 December 2023 Closing inventory 200
st

Student’s Book Form Five
43

23/06/2024 17:34
ACCOUNTANCY_DUMMY_23 JUNE.indd 43 23/06/2024 17:34
ACCOUNTANCY_DUMMY_23 JUNE.indd 43