Chapter 9

Inventory (stock) valuation

Inventory (stock) valuation

A good estimate of closing stock is provided by three methods of stock valuation:

First-In-First-Out (FIFO) Method Last-In-First-Out (LIFO) Method Average Cost (AVCO) Method

First-In-First-Out (FIFO) Method

In this method we assume that the first set of inventory received is the first to leave the warehouse. The resulting ending inventory will be valued at current prices.

First-In-First-Out (FIFO) Method

Stock valuation schedule (FIFO)January 1, 2006 - June 30, 2006

2006 Receipts Issues BalanceJan 200@$10 0 200@$10 = $2 000

200@$10 = $2 000

300@$14 = $4 200500 $6 200

200@$10

50@$14

250250@$14 = $ 3 500

450@$15 = $ 6 750

700 $10 250

250@$14 = $3 500

June 450@$15 0

Feb 300@$14 0

April 0

Last-In-First-Out (LIFO) Method

In this method we assume that the last set of inventory received is the first to leave the warehouse. The resulting ending inventory will be valued at older prices.

Last-In-First-Out (LIFO) Method

Stock valuation schedule (LIFO)January 1, 2006 - June 30, 2006

2006 Receipts Issues BalanceJan 200@$10 0 200@$10 = $2 000

200@$10 = $2 000300@$14 = $4 200500 $6 200 50@$14 = $ 700200@$10 = $2 000250 $2 700 50@$14 = $ 700200@$10 = $ 2 000450@$15 = $ 6 750700 $ 9 450

Feb 300@$14 0

April 0 250@$14

June 450@$15 0

Average Cost (AVCO) Method

In this method, each time goods are purchased we calculate a new average cost of inventory. The average cost is calculated using the equation

Average cost of inventory=Total value of goods on hand ÷

Quantity of goods on handThe resulting ending inventory will be valued

at the last calculated average.

Average cost (AVCO) Method

Stock valuation schedule (AVCO)January 1, 2006 - June 30, 2006

2006 Receipts Issues Average Balance

Jan 200@10 0 $10.00 200@10=2000

Feb 300@14 0 $12.40 500x12.40=6200

Apr 0 250@12.40 $12.40 250@12.40=3100

June 450@15 0 $14.07 700@14.07=9850