ACCA Audit and Assurance (F8) Practice Exam

What method can be used for inventory valuation?

1. Last In First Out (LIFO)

2. Net Realizable Value (NRV)

3. Standard costing method

4. All of the above

The correct answer is: All of the above

The method of inventory valuation encompasses several approaches, all of which are valid for determining the cost of inventory in financial reporting. Last In First Out (LIFO) is a method where the most recently purchased or produced items are considered sold first. This can lead to different profit outcomes depending on the cost of goods purchased over time, especially in an inflationary environment. Net Realizable Value (NRV) is based on estimating the selling price of inventory minus any expected costs to complete and sell. This method is particularly significant as it ensures that the inventory is valued at the lower of cost or market, providing a conservative approach to asset valuation. Standard costing method involves assigning expected costs to inventory based on predetermined standards. This is particularly useful in manufacturing environments as it simplifies inventory management and provides cost control and variance analysis. Each of these methods has its own relevance and utility depending on the circumstances of the business, inventory type, and accounting policies adopted. Therefore, the recognition of all these methods as valid options highlights the flexibility and diversity in inventory valuation practices.