Methods of stock valuation
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Transcript of Methods of stock valuation
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Methods of inventory valuationSection 10Objectives 6 and 7
(a) List methods of inventory valuation(b) Calculate the value of closing
inventory(c) Assess the effect of different
methods of inventory valuation on profit
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Methods of inventory valuation
• Reasons for valuing unsold inventory:• Business owners value unsold stock at
the end of each financial year so that he or she can calculate the gross profit or loss made on sales
• The ending inventory figure is needed to derive the cost of goods sold, as well as the ending inventory balance to include in a company's balance sheet.
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• Look at the following video explaining the concept of ending inventory
Calculate Ending Inventory: Formula & Explanation
Study.com
http://study.com/academy/lesson/calculate-ending-inventory-formula-lesson-quiz.html
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Methods of inventory valuation– Businesses may value year end inventory by
using different methods– It is important to value stock using the same
method. Using different methods, will produce large differences in calculating profits
– These methods are• First in first out (FIFO)• Last in first out (LIFO)• Weighted average cost (AVCO)
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• This method assumes– that the first goods bought are the first
goods to be sold– The earliest goods purchased are the first to
be recognised as cost of goods sold– Ending inventory is calculated on the latest
units purchased– The latest prices used for the FIFO method
gives the highest valuation of stock and the highest gross profit
First in first out (FIFO)
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• Look at the video on the next slide and watch FIFO Inventory method
FIFO inventory methodEducation Unlocked
https://www.youtube.com/watch?v=Wa83L8TvoaM
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• This method assumes– That the last goods bought are the first goods
to be sold– The costs of the latest goods purchased are
the first to be assigned to cost of goods sold– Ending inventory is calculated on the oldest
units purchased– LIFO value inventory on older prices give the
lowest value on stock and profit
Last in first out (LIFO)
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• Look at the video on the next slide and watch LIFO inventory method
LIFO Inventory method
Education Unlocked
https://www.youtube.com/watch?v=zLAvpS6o25E
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• This method makes no assumption about the movement of stock.
• It assumes– That the goods available for sale have the
same average cost per unit– The goods available for sale is allocated on
the basis of the weighted average unit cost– The formula used to calculate the unit cost
is• Total value of goods on hand (goods available
for sale) ÷quantity of goods on hand
Weighted average cost (AVCO)
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Methods of inventory valuation• The formula to determine the
value of closing inventory isAverage cost per unit x remaining units
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Methods of inventory valuation• Look at the video on the next
slide on Average Cost inventory
Average Cost inventory methodEducation Unlocked
https://www.youtube.com/watch?v=qAWVVw-dC5A
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Advantages of each of the inventory valuation methods
FIFO LIFO AVCO
1. Assumes that goods are issued in the order they are received
1. Assumes that goods received last are issued first
1. Makes no assumption about how goods are issued
2. Closing stock is valued on the most recent prices
2. Closing stock is valued on the earlier prices
2. Average price is mainly affected by the amount bought at the different price
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• Disadvantages of each of the inventory valuation methods
FIFO LIFO AVCO
If prices are rising, closing stock is valued at the latest prices
If prices are falling, profits will be high
A new average must be calculated with every purchase