1. 4.5.d STOCK VALUATION (HL) Why value stock? When final accounts are produced, a firm must calculate the value of the stocks it is holding. The value of stock at the beginning and at the end of the trading year are required for the calculation of profit

2. How to value stock? Value of stock = Quantity x Price - Physical stock take -Perpetual inventory system A physical stock-take can be used to find out how much stock is held at the end of the year by listing all raw materials, finished goods and work-in-progress. Determination of Quantity: The perpetual inventory system simply means that after each issue or receipt the physical balance is calculated. With this system, stock levels can be continuously identified for control purposes.

3. Which price to use? The prudence concept does not allow selling price to be used because profit is only recognised when a sale has been made. So, stocks are normally valued at cost price. However, the net realisable value is used when it is lower than cost, (e.g. when goods are damaged in stock or when the market value has fallen below cost price.

4. Cost of stock changes over time. A firm can buy some goods at the start of the year but finds that half-way through their cost of replacement has gone up. -FIFO (First in First out) -LIFO (Last in First out) -AVCO or AC (Average cost) Which cost price? So, how are they valued? Three methods can be used :

5. Example Date In cost price out (units) ($)(units) Oct 1 150 4 5 100 4.5 1090 80 15 100 5 2570 3160 Calculate the closing stock using FIFO and LIFO Prepare profit and loss a/c using FIFO and LIFO

6. MonthPurchases (units)Sales (units) May6000 @ $33400 June5000 @ 3.205620 July7000 @ 3.407560 August3000 @ 3.202175 Tom introduced a new Japanese product, a laser light key ring, into its product range in May 2005. Costs per unit for the Key ring changed as exchange rates fluctuated. Tom charged $10 per key ring. Stocks of key rings were ordered on the first of each month. Sales are shown for the whole month. The table shows stock movements for the first four months of operations: Required: Using both the FIFO and LIFO methods of stock valuation calculate: -The value of stock at the end of each month and -The gross profit for the period May to August. IB exams question (Nov 05 Paper 1 Question 5)

7. Answer: Closing stock valuation stock is issued/sold in the order in which it was delivered MonthPurchasesSales Balance May 6000 @ $33400 @ $32600 @ $3 =$7800 June 5000 @ 3.2 2600 @ $3 1980 @ $3.2=$6336 July7000 @ $3.4 1980 @ $3.2 1420 @ $3.4=$4828 Aug3000 @ $3.2 1420 @ $3.4 2245 @ $3.2=$7184 3020 @ $3.2 5580 @ $3.4 755 @ $3.2 FIFO

8. Closing stock valuation Month PurchasesSalesBalance May6000 @ $33400 @ $32600 @ $3 =$7800 June 5000 @ $3.2 1980 @ $3 =$5940 July7000 @ $3.4 1420 @ $3 =$4260 Aug3000 @ $3.22175 @ 3.2 1420 @ $3 =$4260 The most recent deliveries are sold/issued before existing stock LIFO: 620 @ $3 560 @ $3 825 @ $3.2=$2640 $6900

9. FIFO: Profit and Loss a/c for 4 months ending 31 Aug. 2005 Sales (18755 x $10) = $187550 Less cost of sales: Purchases = $67400 Less c.stock = 7184 60216 Gross profit 127334 Sales (18755 x$10) $187550 Less cost of sales: Purchases$67400 less c.stock 6900 60500 Gross profit127050 Workings: Purchases=(6000x3)+(5000x3.2)+( 7000x3.4 )+(3000x3.2)=$67400 LIFO: Profit and Loss a/c for 4 months ending 31 Aug 2005

10. Features of method compared It is easy to understand and easy to calculate It is an actual price system and not an average price It reflects sound storekeeping whereby oldest batches are issued first In times of inflation, stock value and profits are overstated compared to LIFO FIFOLIFO It is easy to understand and easy to calculate It is an actual price system and not an average price It is not a sound storekeeping method, particularly for perishable goods, where oldest batches should not be issued last In times of rising prices, stock value profits are understated compared to FIFO Closing stock is based on most recent prices Closing stock is based on oldest prices

11. Practice: Exams questions N11 H2 Q5: effects of using Fifo and LIfo M11 H2 Q1:Lifo + Lifo + comment on Lifo M06 H2 Q6: c.stock+profit (Lifo,fifo +o.stock N06 H2 Q4: c.stock+profit (Lifo,fifo +o.stock N05 H1 Q5: c.stock+profit (Lifo,fifo N04 H2 Q6: c.stock+profit (Lifo + effect of lifo M03 H2 Q2: c.stock+profit (Lifo,fifo M02 H2 Q1