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Methods of stocks valuation are devices which aim to deal with some of the problems. W shall consider some of those commonly adopted.

(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

  1. Explain why the valuation of stock is necessary in a business.
  2. Outline and discuss the common problems associated with stock valuation.
  3. 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

THE THREE – COLUMN CASH BOOK

CLASSIFICATION OF LEDGER ACCOUNTS

CLASSES OF LEDGER

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