Stock Valuation Methods

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Stock Valuation Methods

• United Kingdom

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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.
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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.
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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.
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An example of stock valuation
Sues 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 ?
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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 2-10p. Her stock is
valued at 60 x 2-10. This amounts to 126-00
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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.
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An example of stock valuation
Sues 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 ?
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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)

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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

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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.
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An example of stock valuation
Sues 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.
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Value of her books

• 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.