Transcript Stock Valuation - Business Studies

Stock Valuation
Lesson 1
Learning Objectives
£
££
To be able to explain what STOCK is
To be able to state the difference
between FIFO and AVCO methods of
valuation
£££ Be able to reconcile stock values with
actual stock
Starter Activity
Work-In-Progress
Stock that is currently in the
Production process, may take
Weeks to become a finished
product
Raw materials and
components
Stock purchased before
production.
Consumables
Items used by the
Business which are not
Intended for resale, an
Office may have a stock
Of paper or envelopes
Used for the calculation
For cost of sales.
VERY IMPORTANT
What Is Stock?
Finished Goods
A stock of finished
Goods may be built up
By the producer
Goods For Resale
An example of this is the
Stock that TESCO may
Hold on its shelves
Sign of an efficient Business
Makes sure that the
Profit is not over valued
PRUDENCE CONCEPT
So you know what stock
You have on the premises
Helps with the
Production of the
Final accounts
Why Value Stock?
Auditors may visit a business and audit stock and cash on the premises
At any time, without warning!!!!!!!!!!
Importance of Stock Valuation

Stock can be valued in a number of ways
1.
2.
What it actually Cost to buy the stock (this will
include delivery costs and possibly making the
product into a saleable item)
Net realisable value, the actual or estimated
price, minus any additional costs
VALUE STOCK AT
COST PRICE
YES
IS THE COST
PRICE LOWER
THAN SELLING
PRICE?
NO
VALUE STOCK
AT SELLING
PRICE (NRV)
Important!!!
Realisable value = Selling price
The selling price less any
Expenses incurred by the
Business, in order to get
The product into a saleable
condition
Any examples?
Activity onto board
PRODUCT COST PRICE SELLING PRICE
A
B
C
D
E
12
23
8
42
17
31
22
14
40
15
How much would you value each PRODUCT?
Activity
PRODUCT
W
X
Y
Z
UNITS
COST
21
13
8
32
16
41
18
10
SELLING PRICE
20
(@c 336)
(@c 533)
50
15 (@realisable 120)
(@c 320)
20
Calculate the Selling Price
What is the total value of stock held on the 12th June2009
£1,309
Methods of Stock Valuation
1.
2.
3.
Stock valuation is made tricky because of the
purchase price, which may vary over a year
(petrol) At the end of the year the business
may not know the actual prices of the items
left in stock. As a result different methods can
be used to value the cost of stocks, Three
methods that help us do this are:
FIFO first in first out
LIFO last in first out
AVCO average cost
Get pupils to research from the Rob Jones
book- PAGE 194
Research the following:
FIFO
AVCO
Stock Valuation
Lesson 2
Lesson Objectives
£
To be able to define FIFO and AVCO
££
To be able to calculate both methods
£££ To evaluate the most appropriate
method of stock valuation
Starter Activity
1.
2.
3.
4.
Why does a business need sources of
finance?
What is the difference between internal and
external sources of finance?
State 2 long term sources of finance
Name the world cup winners in backwards
order from 2006 to the date of your birth.
World Cup
1966 England
1970 Brazil
1974 Germany
1978 Argentina
1982 Italy
1986 Argentina
1990 Germany
1994 Brazil
1998 France
2002 Brazil
2006 Italy
Importance of inventory valuation
The value of stock appears on both the
trading profit and loss account and also
the balance sheet
 If the closing stock value is placed too high
then both the profit and the assets will be
overstated, and vice versa

After completing your homework you
should be able to answer the following
1.
2.
3.
4.
5.
Define FIFO
Define AVCO
State one advantage of using the FIFO
method
What kind of business would use FIFO?
Explain your answer
How will fluctuations in unit price impact
both methods of valuation?
FIFO
This method assumes that stock is used in
the order in which it was bought
 Any unused stock is therefore the most
recently bought
 Advantages
 A realistic method,
 Easily to calculate, using actual prices of
stock. Closing stock will be based on the
most recent prices

FIFO cont..
Disadvantages
 The stock taken for production may have
an out of date price, this may mean that
the selling price is not taking into
consideration the more recent prices

AVCO
AKA the average weighted cost
 Calculates the average cost from all units
purchased

Existing stock value + value of latest purchase
Average cost=
Number of Units in stock
AVCO continued








Advantages
It makes sense to use this method since all units are
given equal value
Fluctuations in unit price are evened out
Conforms to the accounting standards
Disadvantages
Average cost needs to be re calculated every time that
price of purchased stock changes
Average cost may not be the same as any of the
purchased prices
Stock prices rise rapidly, average cost will be much
lower than replacement price
LIFO-just for your information
Last in first out method, newest stock is always
used first
 Unused stock is based on the cost of earlier
purchases
 ADVANTAGES



Based on the prices of most recently purchased goods,
selling price can reflect this, easy to calculate
DISADVANTAGES

May be difficult to use up new stock first, for instance
when dealing with food. Closing stock will use out of date
prices, so may go against inland revenue requirements
Activity
Sorensen Mills is a food processing company. It
refines and packs flour for large supermarkets.
The business’ main raw material is grain that it
buys from a Canadian supplier. During April, the
following stock transactions were recorded:
3rd
20 tonnes delivered @£100 per tonne
10th
40 tonnes delivered @ £110 per tonne
12th
40 tonnes were used in production
18th
40 tonnes were delivered @ £120 per tonne
29th
40 tonnes were used in production
a) Assuming that the opening stock was zero, calculate the value of closing stock at
the end of April using the FIFO, LIFO and AVCO method
b) Which method of valuation is most appropriate for Sorensen Mills? Explain your
answer
Activity 2

Luke runs an electrical shop he has
asked for your help when considering the
value of the following items
COST NRV
1.
2.
3.
4.
Washing machine
Dish Washer
Television
220
330
250
350
280
325
Comment
replacement cost is £290
case scratched, needs
replacing at a cost of £90
DVD Player
75
125
Remote lost, will cost
£20
ADVISE LUKE OF THE VALUE OF EACH ITEM
Answer
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1) Cost price is lower
2) Net realisable value of £280 used.
Replacement cost is not used as it does not
apply to the stock valuation
3) Replacements are needed before the sale, so
deduct the cost of replacements from the NRV,
compare this figure with the cost and use the
lowest, NRV is used giving £235
4) Needs a control, 125-20 = 105, compare with
cost of 75, cost is lower so use the £75
Homework

Complete sheet

Due in next lesson
Impact on profit
This is a common exam question…
 Assess the effect each of the two methods
of inventory (stock) valuation would have
on profits:

 i)
in the short term
 ii) in the long term
 Typically
3-4 marks
Impact on profit (answer)

Long term
 Profits
will be the same, as all stock will be
used up

Short term
 FIFO
produces higher profits than AVCO
Any impact on cash?
 No as the same price is paid to the
suppliers for the stock

Plenary

Put your name on the POST IT note, and
complete the following sentences

I am ….% confident with stock valuation

I would like to …. To help me fully grasp stock
valuation

Stick the POST IT note on the door frame,
Lesson Objectives
£
To be able to define FIFO and AVCO
££
To be able to calculate both methods
£££ To evaluate the most appropriate
method of stock valuation