Accounting Online Program Certification Practice Test

Using a first in first out basis, what is the value of closing inventory for Carlisle at the end of May?

1. £1,200

2. £1,500

3. £1,700

4. £2,000

The correct answer is: £1,700

To determine the value of closing inventory using the first in, first out (FIFO) method, it's essential to understand how FIFO operates. FIFO assumes that the earliest goods purchased or produced are the first to be sold. Therefore, the value of the closing inventory consists of the most recently acquired items. In this scenario, to find the value of closing inventory, you would start with the most recent purchases and work backward until you have accounted for all units in inventory. By calculating the value based on the last purchases, you'll be able to ascertain what remains in stock at the end of May. When choosing £1,700 as the closing inventory value, it implies that the most recent purchase prices were used in accordance with the FIFO method. This reflects that you have taken into account only the latest acquisitions still on hand, effectively following the FIFO flow of costs, which results in a higher closing inventory value during periods of inflation if prices have risen. The chosen value of £1,700 indicates that, based on the calculations of inventory costs using FIFO, this represents an accurate reflection of what remains in stock at the end of May, consistent with the FIFO principles.