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Questions and Answers
What will be the effect of changing the accounting policy from AVCO to FIFO if prices of goods purchased are expected to rise?
How would changing the accounting policy from AVCO to FIFO impact profits?
What is the likely outcome on closing inventories if the accounting policy is switched from AVCO to FIFO?
If prices rise, what effect will changing the accounting policy have on profits?
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What will be the overall impact on profitability and closing inventory value when switching from AVCO to FIFO?
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Study Notes
Impact of Changing Accounting Policy from AVCO to FIFO
- If prices of goods purchased are expected to rise, switching from AVCO (Average Cost) to FIFO (First-In, First-Out) will result in lower profits, as FIFO will match the earlier, lower-cost goods with sales, leaving the higher-cost goods in inventory.
- Changing the accounting policy from AVCO to FIFO will lead to lower profits, as FIFO will report earlier, lower costs as COGS (Cost of Goods Sold), increasing profit margins.
- Switching to FIFO will result in higher closing inventories, as the earlier, lower-cost goods are sold, leaving the higher-cost goods in inventory, increasing inventory values.
- If prices rise, changing the accounting policy from AVCO to FIFO will reduce profits, as FIFO will report lower profit margins due to earlier, lower costs being matched with sales.
- The overall impact of switching from AVCO to FIFO will be lower profit margins and higher closing inventory values, as FIFO matches earlier, lower costs with sales, leaving higher-cost goods in inventory.
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Description
Test your knowledge on the effects of changing accounting policies from AVCO to FIFO method for inventories. Understand how rising prices can impact profit and the value of closing inventories.
