Beruflich Dokumente
Kultur Dokumente
Inventory Valuation
Learning Objectives:
You should be able to:
Describe what perpetual and periodic inventories
are
Calculate the value of inventory using FIFO basis
Calculate the value of inventory using AVCO basis
Describe the merits & defects of each method
Importance of Inventory
Valuation
Value of inventory determines cost of sales &
therefore gross profit.
It also affects working capital in the Statement
of Financial Position.
Why do firms hold stocks?
Transactions motive-to meet production & sales
requirements.
Precautionary motive-supply of raw materials
may be unreliable.
Speculative motive-to speculate on the expected
increase or decrease in future prices.
Definitions
Inventories include:
- Goods or other assets purchased
for resale
- Raw materials and components
purchased for incorporation into
products for sale
- Products & services in intermediate
stages for completion work in
progress
- Finished goods
Definition
Cost :Expenditure which has been
incurred in the normal course of
business in bringing the
inventory to its present location
and condition
Cost
Cost of conversion comprises
a)
costs which are specifically attributable
to units of production
b)
production overheads
c)
other overheads, if applicable
Production overheads:
Overheads incurred in respect of
materials, labour or services for
production, based on the normal level of
activity
6
Stock/inventory
- a record of goods received by, and
used or sold by, a business
Perpetual inventory
- maintains a running balance of
stock-in-hand after each transaction
Periodic inventory
- shows the balance of stock-on-hand
only at intervals
7
Methods of Valuing
Inventories
FIFO
AVCO
o
10
Example
Date
Details
Units
Unit cost
2005
Jan 1
Balance b/f
100
$
8
Feb 7
Purchases
400
10
Jun 3
Sales
300
Aug 8
Purchases
500
12
Oct 2
Sales
400
Nov 5
Sales
100
Dec 8
Purchases
200
13
11
100 @ $8
800
100 @ $8
800
400 @ $10 4000 4800
100 @ $8
200 @ $10
Nov 5
Dec 8 200 @ $13
200 @ $10
200 @ $12
100 @ $12
14
Aug 8
100 @ $8 800
500 @ $9.60
4800
400 @ $10
Jun 3
300 @ $9.60
500 @ $12
200 @ $9.60
1920
Oct 2
400 @ $11.314
300 @ $11.314
3394
Nov 5
100 @ $11.314
200 @ $11.314
2263
400 @ $12.16
4863
Dec 8
200 @ $13
15
FIFO - Advantages
Simple to use
A realistic system
Prices used to value inventories are prices actually
paid
Closing inventories are valued on current price
levels
In times of rising prices, closing inventories will be
valued at the high prices, which results in lowering
cost of sales and increasing gross profit, thus
Statement of Comprehensive Income will look
favourable to the investors.
Recommended under MFRS 102 and IAS 2.
16
FIFO - Disadvantages
AVCO - Advantages
18
AVCO - Disadvantages
19
Ignorance
Convenience
Custom
Taxation
Motivated by borrowing
Motivated to sell co at higher price
Remunerations
Lack of info
Advice of the auditors
20