Methods of stocks valuation are devices which aim to deal with some of the problems. W shall consider some of those commonly adopted.
Table of Contents
(I) FIRST-IN-FIRST OUT (FIFO) METHOD
This method assumes as the name indicates that items of stock were sold during the year in the order in which they were originally bought. Goods that were bought first (FIRST-IN) were those that were sold first, or issued first for production (FIRST-OUT). It follows then that items of closing stock will be made up of those bought most recently.
Example:
A firm had a stock of 100 items at the beginning of an accounting year. The items were valued at N2.00 each purchases during the year were as follows.
N
January 200 units at N3 each 600
June 300 units at N4 each 1,200
Dec. 100 units at N5 each 500
300 2,300
500 units were sold during the year for N3,500. Find
(a) The value of closing stock of goods and
(b) The cost of goods sold.
If FIFO method of valuing closing stock is used.
SUGGESTED SOLUTION
(a) Value of closing stock
Since the FIFO method of valuation is used, the closing stock of 200 units is made up of items bought most recently. Hence
N
100 units bough in June at N4 each 400
100 units bought in Dec. at N5 each 500
200 units of stock at end has a value of 900
(b) Cost of goods sold
Under FIFO, goods are deemed to be sold in the order in which the items bought first being sold first. Hence
N
100 units sold from opening stock cost N2 each 200
200 units sold from January purchases N3 each 600
200 units sold from June purchases cost N4 each 800
500 1,600
(II) LAST-IN-FIRST OUT (LIFO) METHOD
This takes the opposite view to the FIFO method and assumes that goods sold during the period are first taken from those most recently purchased. On the basis of this assumption, the closing stock of goods is taken to comprise items bought first.
Example:
Same as under FIFO
SUGGESTED SOLUTION
(a) Value of closing stock
N
100 units held at the beginning values at N2 each 200
100 units bought in January at N3 each 300
200 units of stock at end has a value of 500
(b) Cost of goods sold
N
100 units bought in Dec. at N5 each 500
300 units bought in June at N4 each 1,200
100 units bought in Dec. at N3 300
500 2,000
(III) WEIGHTED AVERAGE COST METHOD
This simply uses the weighted average method to value closing stock and cost of goods sold.
Example:
Same as in under FIFO
SUGGESTED SOLUTION
Months Units Unit cost Total cost(N)
January (Opening) 100 x 2 200
January (Purchases) 200 x 3 600
June (Purchases) 300 x 4 1,200
June (Purchases) 100 x 5 500
December (Purchases) 700 2,500
Weighted Average cost: N2,500÷700=N3.57
(a) Value of closing stock
N
No of units of closing stock 200
Weighted average cost per unit 3.57
Value of closing stock 3.57×200
= 714
(b) Cost of Goods sold
N
Number of units sold 500
Weighted average cost per unit sold 3.57
Cost of all units sold 3.57×500
= 1,785
ASSIGNMENT
- Explain why the valuation of stock is necessary in a business.
- Outline and discuss the common problems associated with stock valuation.
- Using the following date, calculate and show
(a) The value of closing stock
(b) The cost of goods sold under
(i) FIFO (ii) LIFO and (iii) Weighted average cost method of stock valuation.
Opening stock: 10 units valued at N20 each.
Purchases
January 20 units at N40 each
March 20 units at N34 each
Sept 40 units at N40 each.
Sales
April 16 units for N46 each
December 48 units for N56 each
See also
CLASSIFICATION OF LEDGER ACCOUNTS