Compare FIFO and weighted average for inventory. How does the choice affect profit when prices are rising?
What the interviewer wants to hear
- FIFO assumes oldest stock is sold first
- Weighted average uses an average cost per unit
- With rising prices FIFO gives lower cost of sales and higher profit and closing stock
- LIFO is not allowed under Ind AS 2 or IAS 2
- Method must be applied consistently and inventory is held at lower of cost and NRV
Model answer
FIFO assumes the oldest units are sold first, so closing inventory is valued at the most recent costs. Weighted average spreads total cost evenly, either over the period or after each purchase. When prices are rising, FIFO charges older, cheaper costs to cost of goods sold, so profit and closing inventory are higher than under weighted average. Weighted average smooths price swings and is simple for businesses with large volumes of similar items, which is why many ERPs default to it. LIFO is not permitted under Ind AS 2 or IAS 2, so it is not an option for Indian or UAE reporting. Whatever method we choose should fit how the goods actually move and be applied consistently; a change needs justification and disclosure. In every case, inventory is carried at the lower of cost and net realisable value, so slow or damaged stock is written down.
Can you answer it under time pressure?
Take a timed medium round and get scored on every answer.
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