Question 3

Lace Plc is a UK company and needs to be IAS compliant. Lace Plc has recently been purchased by Shoe Inc, a US company.

Mr Sole, the finance director of Shoe Inc, has come to Lace Plc to evaluate their accounts. He notes that Lace Plc is using the FIFO method of inventory valuation. This is not comparable to Shoe Incs inventory valuation as they have adopted the LIFO system of valuation. Mr Sole suggests that Lace Plc should change their system of valuation to the US LIFO system adopted by Shoe Inc.

Lace Plc has the following inventory transactions:-

Day 1 Opening inventory nil

Day 2 Purchased 50 units at 15 per unit

Day 3 Sold 20 units at 35 per unit

Day 4 Purchased 60 units at 17 per unit

Day 5 Purchased 80 units at 30 per unit

Day 5 Sold 30 units at 40 per unit

Requirement:

1. Apply the Average costing method to each transaction and calculate the closing value of inventory.

2. Evaluate the LIFO and FIFO inventory valuation methods and advise Mr Sole which method Lace Plc should use to remain IAS compliant.

(maximum word count 300 words)