Transcript Stock Valuation Methods

Stock Valuation Methods
United Kingdom
FIFO First In – First Out
International Accounting Standards no longer permit the
use of the last in – first out (LIFO) method of determining
the valuation of stock.
IAS 2 will allow the continued use of first in – first out
(FIFO) and of the average cost method (AVCO)
Some inventories do not fall into IAS 2. These include
agricultural products after harvest and mineral products
which are measured at net realisable value.
What is FIFO ?
This is the most common method of determining stock
valuation. It makes the assumption that the first stock
received will be the first that is sold.
Older stocks are assumed to be sold before the most
recent stock.
The stock valuation then is made on only the most recent
stock.
Choosing a Method
Once a method for stock valuation has been selected a business
should continue to use that method unless there is a very good
reason to change the method.
This is an example of the consistency concept in accounting.
An example of stock valuation
Sue’s Bookstore is making a stock valuation for the title
“Accounting Concepts and Principles”
In week 1 she bought 100 copies at £2-00 and sold 80 copies at
£3-50p
In week 2 she bought 200 copies at £2-10 and sold 160 copies
at £3-75
What is the value of her stock at the end of week 2 ?
Finding the solution FIFO
She has purchased 300 copies of the book, 100 in week 1 and
200 in week 2.
She has sold 240 copies of the book.
At the end of week 2 she has 60 copies left.
These books are from the batch purchased in week 2 at £210p.
Her stock is valued at 60 x £2-10.
This amounts to £126-00
What is AVCO ?
The average cost of the items purchased is calculated at the end
of the period.
When new stocks are received then a new average cost must be
calculated.
An example of stock valuation
Sue’s Bookstore is making a stock valuation for the title
“Accounting Concepts and Principles”
In week 1 she bought 100 copies at £2-00 and sold 80 copies at
£3-50p
In week 2 she bought 200 copies at £2-10 and sold 160 copies
at £3-75
What is the value of her stock at the end of week 2 ?
Finding the solution AVCO
• At the end of week 1 there are 20 books in stock
purchased at £2-00. These are valued at £40-00
• At the start of week 2 there are 200 books valued
at £420-00
• This makes a total of 220 books costing £460-00.
• This is an average of £2-09 (to the nearest penny)
Finding the solution 2
• There are 60 books left at the end of week 2
• These are valued at £2-09 each
• This gives a stock valuation of £125-40
Net Realisable Value
Suppose the stock is valued and then the owner of the
business realises that the goods cannot be sold for that price.
Stock should be valued at the lower of cost and net realisable
value.
This is an example of the prudence concept in accounting.
An example of stock valuation
Sue’s Bookstore is making a stock valuation for the title
“Accounting Concepts and Principles”
In week 1 she bought 100 copies at £2-00 and sold 80 copies at
£3-50p
In week 2 she bought 200 copies at £2-10 and sold 160 copies
at £3-75
At the end of week 4 she is left with 60 books which she
expects to be able to sell at £1-75 each.
Value of her books
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There are 60 books left
Each is valued at £1-75.
The total value of the stock is 60 x £1-75.
The value is £105-00.