Stock Valuation Methods United Kingdom

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.

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.

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.

An example of stock valuation Sue’s 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 ?

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

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.

An example of stock valuation Sue’s 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 ?

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)

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

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.

An example of stock valuation Sue’s 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.

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.