Blog: Fin621 GDB No. 2 solution

Semester “Spring 2011”

“Financial Statement analysis(FIN621)”

This is to inform that next Graded Discussion Board (GDB)

will be opened according to the following schedule

Schedule

Opening Date and Time
May 27 , 2011 At 12:01 A.M. (Mid-Night)Closing Date and Time 
May 31 , 2011 At 11:59 P.M. (Mid-Night)


Topic/Area for Discussion

“ Inventory valuation methods and costing of inventory ”

Note: The discussion question will be from the area/topic mentioned above. So start learning about the topic now.


“ABC Limited deals in generators of different brands and capacity. The least expensive generator is priced at Rs. 500,000 and the most expensive generator cannot be sold for more than Rs. 5,000,000. The inventory of the generators consists of 20 generators and no two are alike. 

ABC Ltd also owned XYZ (Pvt) Ltd producing battery cells. ABC Ltd planned to issue IPO of XYZ (Pvt) Ltd. within next five years; therefore, focusing on maximizing the profitability of the company XYZ (Pvt) Ltd, which is also facing the challenge of rapid inflation.” 

Required: Identify most appropriate inventory valuation method for Company ABC Ltd and Company XYZ (Pvt) Ltd along with stating a valid reason for choosing particular inventory valuation method in just one line.

Hint: Write your answer in the following format.

.
Company Name
Answer: 

ABC Limited
a) Inventory Method:________________________


b) Specific reason for choosing this method:___________________________________________


XYZ (Private) Limited

c) Inventory Method:_________________________


d) Specific reason for choosing this method:__________________


Solution:


ABC Limited
a) Inventory Method:Specific Identification Method
b) Specific reason for choosing this method: We can identify Items which are only 20 and vary in their description and price.

XYZ (Private) Limited

c) Inventory Method:FIFO

d) Specific reason for choosing this method:During Inflation the FIFO will show high profits to the investors.
:::::::::::::::::::::::::::::::::::::::


ANSWER:
ABC Limited
METHOD: Specific Identification Method
REASON: It relates the ending inventory goods directly to the specific price they were bought for

XYZ (Private) Limited
METHOD: FIFO Method
Reason: FIFO method is suitable when prices are increase and economy facing inflation challenges.