UNIT 10: STOCK

VALUATION Date: Week 11

Lecturer: A. Simmons

METHODS
 KNOWLEDGE OUTCOMES:

• Stock valuation methods: FIFO/LIFO/Average Stock

• How stock valuation affects the balance sheet
• Effect of inventory errors on the balance sheet
• Calculating FIFO
• Calculating LIFO
• Calculating closing stock
 STOCK
VALUATION
METHODS
 INVENTORY VALUATION

• Inventory valuation is an accounting practice that is followed by

companies to find out the value of unsold inventory stock at the time
they are preparing their financial statements. Inventory stock is an
asset for an organization, and to record it in the balance sheet, it
needs to have a financial value. This value can help you determine
your inventory turnover ratio, which in turn will help you to plan
your purchasing decisions.
• An inventory valuation should follow a full stock take to take into
account any gift sales, free samples, returns, damage or theft. Any
loss of inventory due to damage or theft won’t be discovered until
the count is done, and by that time it won’t be easy to determine
where and when it happened.
 FIRST IN FIRST OUT (FIFO)

• In FIFO, you assume that the first items purchased are the first to
leave the warehouse. In other words, whenever you make a sale,
under FIFO, the items will be subtracted from the first list of
products which entered your store or warehouse.
• Use the newest purchase rate for the number of items included in the
newest order, then use the previous rate for the remaining items.
 FIFO EXAMPLE

Imagine if a company purchased 100 items for $10 each, then later
purchased 100 more items for $15 each. Then, the company sold 60
items.
Under the FIFO method, the cost of goods sold for each of the 60
items is $10/unit because the first goods purchased are the first goods
sold.
Of the 140 remaining items in inventory, the value of 40 items is
$10/unit and the value of 100 items is $15/unit. This is because
inventory is assigned the most recent cost under the FIFO method.
 https://www.youtube.com/watch?v=IqBhf-1hzbk
FIFO VIDEO:
 LAST IN FIRST OUT (LIFO)

• In LIFO, you make the opposite assumption: that the last items that
enter your store are the first ones to leave.
• Use the oldest purchase rate for the number of items included in the
oldest order, then use the next rate for the remaining items.
 EXAMPLE OF LIFO

Let’s say you are the owner of a clothing store and you ordered ten
shirts at $10 each. Three days later, you made another order of 20
shirts at $15 each. After a week, your inventory showed that 15 shirts
have been sold. You now want to record the inventory cost. If you are
to make use of the LIFO method, how much can you put down as the
cost of sold goods?
 https://www.youtube.com/watch?v=f5Pv2ZjLFWY
LIFO VIDEO:
 AVERAGE STOCK (AVCO)

The weighted average cost (WAC) method uses the item’s average cost
throughout the year. The average cost per unit is calculated by dividing
the total cost by the total number of units purchased during the year.
 RELATIONSHIP
BETWEEN STOCK
VALUATION
METHODS AND THE
INCOME
STATEMENT/ PROFIT
AND LOSS ACCOUNT
 EFFECTS ON INCOME
STATEMENT
The method a company uses to value its inventory directly affects its
gross profit and income statement, which gives banks and investors an
idea of financial performance. Inventory valuation also affects a
company’s balance sheet, which lists the company’s assets and
liabilities. Inventory is treated as a current asset for accounting
purposes, along with cash, temporary investments, accounts
receivable, supplies and prepaid insurance.
 EFFECT OF
INVENTORY
ERRORS
 INCOME STATEMENT
EFFECTS
An incorrect inventory balance causes an error in the calculation of
cost of goods sold and, therefore, an error in the calculation of gross
profit and net income. Left unchanged, the error has the opposite effect
on cost of goods sold, gross profit, and net income in the following
accounting period because the first accounting period's ending
inventory is the second period's beginning inventory. The total cost of
goods sold, gross profit, and net income for the two periods will be
correct, but the allocation of these amounts between periods will be
incorrect. Since financial statement users depend upon accurate
statements, care must be taken to ensure that the inventory balance at
the end of each accounting period is correct.
 BALANCE SHEET EFFECTS

An incorrect inventory balance causes the reported value of assets and

owner's equity on the balance sheet to be wrong. This error does not
affect the balance sheet in the following accounting period, assuming
the company accurately determines the inventory balance for that
period.
 •Questions

•Particulars

•Jan 1. Received 500 units at $20.

•Jan 10. Received 300 units at $24

CALCULATING •Jan 15 issued 700 units

FIFO •Jan 20. Received 400 units at $28

•Jan 25. Issued 300 units

•Jan 28. Received 500 units at $22

•Jan 31. Issued 200 units

•From the information above, prepare the stores ledger using FIFO
and LIFO Method
 Store Ledger FIFO
Receipts Issues Balance
Date Qty Price Amt Qty Price Amt Qty Price Amt
1-Jan 500 20 10000 500 20 10000
500 20 10000
10-Jan 300 24 7200 300 24 7200

15-Jan 500 20 10000

200 24 4800 100 24 2400
100 24 2400
20-Jan 400 28 11200 400 28 11200

25-Jan 100 24 2400

200 28 5600 200 28 5600
200 28 5600
28-Jan 500 22 11000 500 22 11000

31-Jan 200 28 5600 500 22 11000

Closing inventoy = 500 units @ $22= $11000

 Questions
Particulatars
Jan 1. openning stock 400 units @$25
Jan 3. issued 200 units
Jan 8 Purchased 300 units @ $26
Jan 10. isssued 200 units
Jan 14. Issued 100 units
jan 17. Purchased 200 units @ $27
Jan 20 Issued 300 units
CALCULATING Jan 21. Return to vendors from goods purchased on 17th Jan, 50
units
LIFO Jan 27. Purchased 500 units @ $28
Jan. 28 Issued 300 units
Jan 30 purchased 300 units @ $30
Jan 31. Issued 30 units

On stock verification on 31 Jan, a shortage of 10 units were found.

Calculate closing inventory for January.

 Store Ledger LIFO
Receipts Issues Balance
Date Qty Price Amt Qty Price Amt Qty Price Amt
1-Jan 400 25 10000
400 25 10000
3-Jan 200 25 5000 200 25 5000
200 25 5000
8-Jan 300 26 7800 300 26 7800
10-Jan 200 26 5200 200 25 5000
100 26 2600
14-Jan 100 26 2600 200 25 5000
17-Jan 200 27 5400 200 27 5400

20-Jan 200 27 5400

100 25 2500 100 25 2500
21-Jan 50 27 1350 50 25 1250
0 50 25 1250
27-Jan 500 28 14000 500 28 14000
50 25 1250
28-Jan 300 28 8400 200 28 5600
50 25 1250
30-Jan 300 30 9000 200 28 5600
300 30 9000
50 25 1250
31-Jan 300 30 9000 190 28 5320
10 28 280

Closing inventory = 50 @$25 and 190 @28

 THE END.

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Exam Revision begin
Assessments due 4,5,6
Exams date TBA.