STOCK VALUATION

Chapter 10
Outcomes
◦ At the end of this chapter students should be able to:

◦ Calculate the value of stock on hand using

◦ FIFO (first-in-first-out method)
◦ weighted average method of stock valuation.
Please ignore
◦ ignore sections 10.1 to 10.3
Stock Valuation Methods
◦ Most companies would either use:
◦ Periodic or
◦ Perpetual
method of recording inventory and calculating cost of sales.
Stock Valuation Methods cont.
Difference
Perpetual
Inventory accounts are updated after each
transaction, i.e. inventory quantities are
continuously updated.
Periodic
The value of ending inventory is determined
at the end of each accounting period by a
physical stock count.
Periodic Inventory System
(periodically)
◦ A purchases account is used when the periodic method of recording inventory is in
operation.

• Whenever goods are bought: they are debited to the purchases account and
◦ When goods are sold; they are credited to the revenue/sales account.

• A separate inventory account is kept but is not used at all during the year. Its sole
function is to keep a record of the opening inventory at the beginning of the year. It is only
adjusted at the end of each financial year.
Periodic Example
◦ Purchase Transaction: The store purchases 100 units of inventory at a cost of R10 per unit.
◦ Sale Transaction: The store sells 50 units of inventory at a price of R20 per unit.
Periodic Example
Purchase of inventory (on Credit)
Purchase Transaction: The store purchases 100 units of inventory at a cost of R10 per unit.

Dr Purchases Cr
Accounts Payable 1000

Calc: 100 units at R10 each

Dr Accounts Payable Cr
Purchases 1000

Note : The purchase does not affect the Inventory account directly under the periodic system.
Periodic Example
Sales of inventory (on credit)
Sale Transaction : The store sells 50 units on credit of inventory at a price of R20 per unit.

Dr Accounts Receivable Cr
Sales Revenue 1000

Calc: 50 units at R20 each

Dr Sales Revenue Cr
Accounts Receivable 1000

Note : No entry is made for the cost of goods sold at the time of sale.
Periodic Example
Purchase of inventory (cash)
Purchase Transaction: The store purchases 100 units of inventory at a cost of R10 per unit.

Dr Purchases Cr
Bank 1000

Calc: 100 units at R10 each

Dr Bank Cr
Purchases 1000
Periodic Example
Sales of inventory (cash)
Sale Transaction : The store sells 50 units of inventory at a price of R20 per unit.

Dr Bank Cr
Sales Revenue 1000

Calc: 50 units at R20 each

Dr Sales Revenue Cr
Bank 1000
Perpetual Inventory System
◦ A cost of sales account is used when the perpetual method of recording inventory is in
operation.
◦ When goods are purchased: they are entered into the trading inventory account and
◦ When goods are sold; they are entered into the sales account, debiting the bank or the
debtor.
◦ In addition, a credit entry is made to the trading inventory account while a debit entry is made
to the cost of sales account .
◦ This keeps a perpetual record of the inventory on hand and keeps a
permanent and up-to-date record of the cost price of the goods that
have been sold.
Perpetual Example
Purchase of inventory (on Credit)
Purchase Transaction: The store purchases 100 units of inventory at a cost of R10 per unit.

Dr Inventory / Trading Stock Cr

Accounts Payable 1000

Calc: 100 units at R10 each

Dr Accounts Payable Cr
Inventory/Trading stock 1000
Perpetual Example
Sales of inventory (on credit)
Sale Transaction : The store sells 50 units on credit of inventory at a price of R20 per unit.
Dr Accounts Receivable Cr
Sales Revenue 1000
Calc: 50 units at R20 each
Dr Sales Revenue Cr
Accounts Receivable 1000

Dr Cost of Goods sold Cr

Inventory 500

Dr Inventory Cr
Cost of Goods Sold 500
Calc: 50 units at R10 (cost of the goods) each
Note : Each sale directly impacts the Inventory and COGS accounts, reflecting the real-time status of
inventory and costs.
Perpetual Example
Purchase of inventory (cash)
Purchase Transaction: The store purchases 100 units of inventory at a cost of R10 per unit.

Dr Inventory / Trading Stock Cr

Bank 1000

Calc: 100 units at R10 each

Dr Bank Cr
Inventory / Trading stock 1000
Perpetual Example
Sales of inventory (cash)
Sale Transaction : The store sells 50 units on credit of inventory at a price of R20 per unit.
Dr Bank Cr
Sales Revenue 1000
Calc: 50 units at R20 each
Dr Sales Revenue Cr
Bank 1000

Dr Cost of Goods sold Cr

Inventory 500

Dr Inventory Cr
Cost of Goods Sold 500
Calc: 50 units at R10 (cost of the goods) each
Note : Each sale directly impacts the Inventory and COGS accounts, reflecting the real-time status of
inventory and costs.
Perpetual - Advantages
◦ In a perpetual inventory system, gross profit (sales – cost of sales) can be determined
without an inventory count.
◦ The physical inventory on hand can be checked against the trading inventory account. The
inventory account reflects the inventory on hand at any moment in time.
◦ Individual items of inventory can be more easily monitored, especially if the business has a
computerized system that updates the inventory records at the till.
Example 2 – Perpetual vs Periodic
◦ Opening inventory, R5 000.
◦ Bought goods on credit for R1 000
◦ Bought goods for cash, R600
◦ Sold goods on credit for R300 (cost R200)
◦ Sold goods for cash R400 (cost R267)
◦ Closing inventory, R6 000
◦ REQUIRED
Record the transactions under both the periodic and perpetual methods by means of
journal entries and calculate the gross profit. The terms “accounts receivable” and
“accounts payable” are used for debtors and creditors, respectively.
Opening inventory, R5 000.
a. Bought goods on credit for R1 000
b. Bought goods for cash, R600
c. Sold goods on credit for R300 (cost R200)
d. Sold goods for cash R400 (cost R267)
Closing inventory, R6 000
Periodic Perpetual
Dr Cr Dr Cr
(a) (a)

(b) (b)

(c)
(c)

(d)
(d)
Periodic Perpetual
Dr Cr Dr Cr
(a) Purchases 1000 (a) Trading Inventory 1000
Accounts Payable 1000 Accounts Payable 1000
(b) Trading Inventory 600
(b) Purchases 600 600
Bank 600
Bank
(c) Accounts Receivable 300
(c) Accounts Receivable 300
Sales Revenue 300
Sales Revenue 300
Cost of Goods Sold 200
(d) Bank 400
Trading inventory 200
Sales Revenue 400
(d) Bank 400
Sales Revenue 400
Cost of Good Sold 267
Trading Inventory 267
Calculating Gross Profit
Periodic Inventory Method Perpetual Inventory Method
R R R
Revenue 700 Revenue 700
Less: Cost of 600 Less: Cost of 467
Goods sold Goods sold
Opening Inventory 5000 Gross Profit 233
Add : Purchases 1600
(1000 + 600)
Less: Closing 6000
Inventory
Gross Profit 100
Stock Valuation Methods
◦ To calculate the value of stock on hand at the end of a given period, the
following methods will be covered:
• First-in-first-out (FIFO)
• Weighted average method
Note:
◦ It is very important to note the following:

◦ When using the FIFO method , values for stock on hand and cost of sales will be
the same regardless of whether a business uses a perpetual or periodic method .
◦ HOWEVER, for the weighted average method , weighted average values used to
calculate stock on hand and cost of sales will differ depending on whether a
perpetual or periodic method is used.
FIRST IN FIRST OUT METHOD
◦ PERIODIC INVENTORY
A physical stock count is done at the end of the accounting period to determine
the inventory on hand (closing balance). Using the FIFO method to compute the cost
of ending inventory, the cost of most recent purchases is used, after which the
cost of goods sold can be calculated.

◦ PERPETUAL INVENTORY
According to this method, the material that is purchased first is used (issued) first.
That is, the oldest stock is issued first at the price at which it was originally
purchased. Consequently, the stock on hand at the end of the financial period
(closing stock) will be valued at the cost of the more recently acquired material,
which is in line with the current market value.
First In First Out (FIFO)
◦ The following transactions have been concluded in respect of a particular stock item for the
month of February 20x1:
1. Stock on hand: 100 units at R10 per unit
3. Issued stock: 40 units
4. Received stock: 160 units at R12 per unit
5. Issued stock: 40 units
6. Issued stock: 60 units
7. Returned stock to the supplier: 20 units received on 4 February 20x1

◦ REQUIRED
Calculate the value of the closing stock for the month of February 20x1 using the
following methods of stock valuation:
• FIFO
FIFO
Solution: Periodic
FIFO Periodic Inventory
Feb Units Cost per rand (unit) Total (in rands)
1 Opening Inv 100 10.00 1000
4 Purchases 160 12.00 1920
7 Returns -20 12.00 - 240
Goods Available 240 1680
Issues -140
Closing 100 1200
FIFO
Solution: Perpetual Inventory
Date Received Issued Balance
Date Received Issued Balance
Feb Units Price Amount Units Price Amount Units Price Amount
1 100 10.00 1000

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
3 40 10.00 400 60 10.00 600

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
4 160 12 1920 60 10 600
160 12 1920
Solution: Perpetual Inventory
Date Received Issued Balance
Date Received Issued Balance
Feb Units Price Amount Units Price Amount Units Price Amount
5 40 10 400 20 10.00 200
160 12.00 1920

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
6 20 10 200 - - -
40 12 480 120 12 1440
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
7 -20 12 -240 100 12 1200
Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
7 -20 12 -240 100 12 1200

◦ Closing Stock Value R1200

◦ Total Cost of Issues = 1480 (400 + 400 + 200 + 480)
◦ Total Cost of purchases = 1680 (1920 - 240)
Example – Exercise 11 from Text book
◦ 20x1 - Zeus Periodic Inventory System
◦ Feb 01 Opening Inventory 200 units @ R18 p/u
◦ Feb 11 Purchases 300 units @ R20 p/u
◦ Sept 16 Purchases 400 units @ R22 p/u
◦ Nov 14 Purchase 100 units @ R24 p/u

On 31 Dec 20x1 – physical stock count finds 300 units on hand.

Required:
Using FIFO, calculate
1. Cost of Closing Inventory
2. Cost of Goods Sold
Solution
FIFO Periodic
Feb Units Cost p/u Total in rands
1 Opening 200 18 3600
Solution
FIFO Periodic
Feb Units Cost p/u Total in rands
1 Opening 200 18 3600
11 Purchases 300 20 6000
Sept 16 Purchases 400 22 8800
Nov 14 Purchases 100 24 2400
Goods Available for sale =20 800
Solution
FIFO Periodic
Feb Units Cost p/u Total in rands
1 Opening 200 18 3600
11 Purchases 300 20 6000
Sept 16 Purchases 400 22 8800
Nov 14 Purchases 100 24 2400
Goods Available for sale =20 800

Dec 31 Less: Closing/Ending 300 =

100
200
Solution
FIFO Periodic
Feb Units Cost p/u Total in rands
1 Opening 200 18 3600
11 Purchases 300 20 6000
Sept 16 Purchases 400 22 8800
Nov 14 Purchases 100 24 2400
Goods Available for sale =20 800

Dec 31 Less: Closing/Ending 300 = 6800 =

100 24 2400 +
200 22 4400
Recall:
Periodic Inventory

Opening Inventory
ADD: Purchases
LESS: Purchase returns
ADD: Carriage/Freight on purchases
LESS: Closing Inventory

= Cost of Goods Sold

Solution
FIFO Periodic
Feb Units Cost p/u Total in rands
1 Opening 200 18 3600
11 Purchases 300 20 6000
Sept 16 Purchases 400 22 8800
Nov 14 Purchases 100 24 2400
Goods Available for sale =20 800

Dec 31 Less: Closing/Ending 300 = 6800 =

100 24 2400 +
200 22 4400
Cost of Goods sold 14 000 (balancing figure)
Homework
◦ Exercise 4 - FIFO
◦ Exercise 8 - FIFO
Exercise 4 – Solution
FIFO
◦ The following information is available for the month of January 20x1 concerning raw material WG,
which is used to manufacture widgets

◦ Opening Stock 160 units at R3.50 each

◦ Received stock 500 units at R4,20 each
◦ Received stock 180 units at R2.25 each
◦ Issue Stock 300 units
◦ Issued stock 370 units

◦ Calculate the value of closing inventory for the month of January

Solution – Exc 4
FIFO Periodic
Jan Units Cost p/u Total in rands
1 Opening 160 3.50 560
Solution – Exc 4
FIFO Periodic
Jan Units Cost p/u Total in rands
1 Opening 160 3.50 560
2 Purchases 500 4.20 2100
16 Purchases 180 2.25 405
Solution – Exc 4
FIFO Periodic
Jan Units Cost p/u Total in rands
1 Opening 160 3.50 560
2 Purchases 500 4.20 2100
16 Purchases 180 2.25 405

Goods Available for sale 840 3065

Solution – Exc 4
FIFO Periodic
Jan Units Cost p/u Total in rands
1 Opening 160 3.50 560
2 Purchases 500 4.20 2100
16 Purchases 180 2.25 405

Goods Available for sale 840 3065

Cost of Goods sold 670 560 + 2100 + 22.5

(300 + 370 given) = 2682.50
160 @ 3.50
500 @ 4.20
10 @ 2.25
Solution – Exc 4
FIFO Periodic
Jan Units Cost p/u Total in rands
1 Opening 160 3.50 560
2 Purchases 500 4.20 2100
16 Purchases 180 2.25 405

Goods Available for sale 840 3065

Dec 31 Less: Closing/Ending 170 170 * 2.25

(840 - 670) = 382.50
(or balancing figure)
Cost of Goods sold 670 560 + 2100 + 22.5
(300 + 370 given) = 2682.50
160 @ 3.50
500 @ 4.20
10 @ 2.25
Exercise 8 – Solution
FIFO
Manufacturers Ltd has provided you with the following information for the month of November 20x1 regarding a part that is
used during the manufacturing process:
1 Stock on hand comprised the following purchases:
Purchases of 25 October 20x1 (80 units at R12 each, total cost of R960)
Purchases of 30 October 20x1 (800 units at R12,40 each, total cost of R9 920)
5 Issued to production 640 units.
9 Purchased 800 units at R12,80 each, total cost of R10 240.
Freight charges on these purchases amounted to R80.
15 Issued 1000 units.
20 Purchased 1200 units at R12,60 each, total cost of R15 120.
25 Returned to the supplier 240 units purchased on 20 November 20x1.
FIFO
Solution: Perpetual Inventory
Date1 Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
1 80 12.00 960
800 12.40 9920
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
5 80 12.00 960 - - -
560 12.40 6944 240 12.40 2976
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
9 800 12.90# 10240 240 12.40 2976
+80#
800 12.90 10320
FIFO
Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
15 800 12.90# 10240 240 12.40 2976
+80#
800 12.90 10320

#(R10 240 + R80) / 800 units = 12.90

Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
15 240 12.40 2976 - - -
760 12.90 9804 40 12.90 516

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
20 1200 12.60 15 120 40 12.90 516
1200 12.60 15 120
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
25 -240 12.60 -3024 40 12.90 516
960 12.60 12096
Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
25 -240 12.60 -3024 40 12.90 516
760 12.60 12096
Closing Stock 12 612

Closing stock value = R12 612 (R516 + R12 096)

Cost of issues to production = R20 684 (R960 + R6 9 44 + R2 976 + R9 804)
Weighted Average Method
Periodic Method
◦ When using the weighted average method, the weighted average unit cost is used to
calculate the cost of goods sold and the cost of ending inventory.
◦ The weighted average unit cost is calculated using the following formula:

!"#$% '"(# ") *+,#( $-$,%$.%/ )"0 ($%/

◦ 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = 1*2./0 ") *+,#( $-$,%$.%/ )"0 ($%/
Weighted Average Method
Perpetual Method
◦ According to this method, the new material that is purchased is added to the material
already in stock. An average price must be determined after each purchase by dividing
the total cost of stock on hand by the total number of units on hand.

!"#$% '"(# ") (#"'3 "+ 4$+5

◦ 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = !"#$% +*2./0 ") *+,#( "+ 4$+5
Weighted Average Method
◦ The following transactions have been concluded in respect of a particular stock item for the month of February
20x1:
1. Stock on hand: 100 units at R10 per unit
3. Issued stock: 40 units
4. Received stock: 160 units at R12 per unit
5. Issued stock: 40 units
6. Issued stock: 60 units
7. Returned stock to the supplier: 20 units received on 4 February 20x1

◦ REQUIRED
Calculate the value of the closing stock for the month of February 20x1 using the
following methods of stock valuation:
• Weighted average method
Weighted average method
Periodic
Weighted Average: Periodic method
February Unit Cost per unit Total (in rands)
1 100 10.00 1000
4 160 12.00 1920
7 -20 12.00 -240
Units available for sale 240 2680

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
2680
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = = 𝑅11.1667 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
240
Weighted average method
Periodic
Weighted Average: Periodic method
February Unit Cost per unit Total (in rands)
1 100 10.00 1000
4 160 12.00 1920
7 -24 12.00 -240
Units available for sale 240 2680

Units available for sale 240

Less: Units sold (40 +40 + 20 + 40) 140
= Units in ending inventory 100

Cost of goods sold 140 x 11.1667 per unit = 1 563.33

Cost of ending inventory 100 x 11.1667 per unit = 1 116.67
Weighted Average Method
Perpetual Method
◦ According to this method, the new material that is purchased is added to the material
already in stock. An average price must be determined after each purchase by dividing
the total cost of stock on hand by the total number of units on hand.

!"#$% '"(# ") (#"'3 "+ 4$+5

◦ 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = !"#$% +*2./0 ") *+,#( "+ 4$+5
Weighted Average Method
Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
1 100 10.00 1000

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
5 40 10.00 400 60 10.00 600

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
7 160 12 1920 220 11.45 2520
!"#$% '"(# ") (#"'* "+ ,$+-
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = !"#$% +./012 ") .+3#( "+ ,$+-
= (600+1920) / (60 + 160) = R2 520 / 220 =
R11.45 . Therefore the next units issued will be at 11.45
Weighted Average Method
Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
5 40 11.45 458 180 11.45 2061
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
6 60 11.45 687 120 11.45 1374

Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
7 -20 12 -240 100 11.34 1134
!"#$% '"(# ") (#"'* "+ ,$+-
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 = !"#$% +./012 ") .+3#( "+ ,$+-
= (1374 -240) / (120 -20) = R1 134 / 100 = R11.34
Therefore the current unit on hand are valued at R11.34
Solution: Perpetual Inventory
Date Received Issued Balance

Feb Units Price Amount Units Price Amount Units Price Amount
7 -20 12 -240 100 11.34 1134

◦ Closing Stock Value R1134

◦ Total Cost of Issues = 1545 (400 + 458 + 687)
◦ Total Cost of purchases = 1680 (1920 - 240)
Homework
◦ Exercise 4 – Weighted Average
◦ Exercise 8 - Weighted Average

◦ Exercise – 5,6, 7 and 12 all