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STOCK VALUATION

Concept;
Stock/inventory
The Tanzania statement of Accounting Guidelines No 2 which deals with the valuation of inventories in the context of the historical cost system states that the term stock/inventories include the following;
  1. Goods or other assets purchased
  2. Consumable stores/consumer goods
  3. Raw materials and components purchased for incorporation in its products for sale
  4. Products and services in intermediate stages of completion
  5. Finished goods
  6. Long-term contract balance
  7. Farms crops
  8. Livestock
CLASSIFICATION AND COST
  • Stock taking; Is the process of determining the quantities of all items of merchandize owned by the business firm at the certain date, usually at the end of accounting period. This involves the actual accounting, measure and weighing of all items of unsold merchandize (stock) in the store.
  • Inventories/stock is classified as assets (currents) in the balance sheet as it is expected that this stock will be sold and be replaced within one accounting period.
  • Accounting for inventories normally follows the cost concept which means stocks are recorded at acquisition cost or whichever is lower.
NOTE
  1. All items of due stock belonging to the business even those in transit have been included in the inventory figure.
  2. All items of merchandize (stock) recorded in the inventory list are legally owned by the business.
STOCK COSTING METHOD
After determining the quantity of merchandize stock at the end of the accounting period, (the balance sheet date) the next step is to assign a cost to each item of merchandize in order to arrive at the value of the ending inventory to be presented in the financial statement
There are two stock/inventory systems which are;
  1. Perpetual stock system
  2. Periodic stock system
Certain assumptions are needed to be made on the flow of goods and their related costs.
  1. First in first out (FIFO); the assumption is that the oldest items in the stock are the first ones sold. Under this method, the ending inventory is assumed to be comprised of the latest purchases. This is a logical assumption for businesses dealing in perishable goods; FIFO represents a natural flow of merchandize.
  2. Last in first out (LIFO); the assumption is that, the most recent items in stock are the first ones sold. Example of these is fashionable goods. Under this method the ending stock is assumed to be comprised of the earliest purchases.
  3. Average cost (AVCO), the stock items has been intermingled, so that the goods sold and the ending stock consists of mixed units. Under this method a weighted average unit cost is calculated for all stock items.
W.A.C= Weighted Average Cost

W.A.C = (Total cost purchase + opening stock)/(Total unit)
PERIODIC METHODEcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - STOCK VALUATION
EXAMPLE
Date:purchases
1/1 = 100 units @ 30/=
5/1 = 50 units @ 40/=
10/1 = 40 units @ 50/=
Sales = 2/1 = 90 units @ 60/=
6/1 = 40 units @ 70/=
11/1 = 30 units @ 50/=

Required: By using periodic method calculate the value of closing stock by FIFO and LIFO
FIFO; total amount of sales 160=90+40+30
Amount of purchases = 190 units= 100+50+40
Closing stock=190-160=30 units
30 x 50 = 1500
. Closing stock of FIFO = 1500
NOTE: Closing stock by FIFO will be valued by the last units value to be purchased.
LIFO; Total amount of sales = 160
Amount of purchases last in first out 190 =100+ 50 + 40

Closing stock = 190-160
30 x 30 = 900
:. Closing stock of LIFO = 900.
NOTE: Closing stock by LIFO will be valued at 30@, the value of list units to be purchased
FIFO
LIFO
WAC
Sales
9700
9700
9700
Less: LOGS
7000
(1500)
7000
(900)
7000
(1105)
LOGS
5500
6100
5895
Gross profit
4200
3600
3805
FIFO
LIFO
AVCO
shs
shs
shs
Sales
250,000
250,000
250,000
less cost of goods sold
Purchases
208,000
208,000
208,000
less Ending inventory
23,600
21,000
22,400
184,400
186,900
185,600

65,600
63,100
64,400

DATE
PURCHASES/ RECEIVED
SALES/ISSUED
BALANCE

QTY
UNIT COST
TOTAL COST
QTY
UNIT COST
TOTAL COST
QTY
UNIT COST
TOTAL COST
2-May
500
20
10,000
500
20
10,000
8-May
300
22
6600
300
22
6600
16,600

800
16,600
10-May
400
20
8000
100
20
2000

300
22
6,600
400
8600
15-May

100
20
2000
200
22
4,400
100
22
2200

200
4,400
20-May
600
25
15,000
200
22
4,400

600
25
15,000
800
19,400
25-May
200
22
4400
100
25
2500
500
25
12,500

500
12,500
27-May
200
26
5200
500
25
12,500
200
26
5,200
700
17,700
30-May

100
25
2500
400
25
10,000
200
26
5,200
600
15,200
Purchases
36,800
COGS
21,600
600
15,200

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DATE
PURCHASES
SALES
BALANCE
QTY
UNIT COST
TOTAL COST
QTY
UNIT COST
TOTAL COST
QTY

UNIT COST
TOTAL COST
2-May
500
20
10,000
500
20
10,000
8-May
300
22
6,600
300
22
6600
800
16,600
10-May
300
22
6600
100
20
2000
400
20
8,000

400
8000
15-May
200
20
4000
200
20
4,000
20-May
600
25
15,000
200
20

4,000
600
25
15,000
800
19,000
25-May
300
25
7500
200
20
4,000
300
25

7,500
200
26
5,200
700
16,700
30-May
100
26
2600
200
20
4,000
300
25

7,500
100
26
2,600
600
14,100
3.By Average Method
Date
Purchases/Received
Sales/Issued
Unicost
Balance
Cash
Unit cost
Cost
Q
R
Q
R
Cost
2 May
8 May
500
300
20
22
10,000
6,600
500
300
20
22
10,000
6,600
800
20.75
16,600
10 May
400
20.75
8300
400
20.75
8300
15 May
200
20.75
4150
200
200
20.75
20.75
4150
4150
20 May
600
25
15,000
600
25
15,000

800
24
19,150
25 July
300
24
7200
27 May
200
26
5200
500
200
24
26
11,950
5200
700
24.5
17,150
31 May
100
24.5
2450
PURCHASES
36,000
Cost of goods sold
22,100
600
24.5
14,700
14,700= Closing stock


ESTIMATING STOCK
When a business firm does not maintain a perpetual inventory system, It has no way of determining the actual stock or inventory on hand unless the physical stock taking is done on a particular date. This will cumbersome and costly if it has to be done several times during an accounting period.
In order to avoid these inconveniences, the business will use an estimated figures its ending inventory.
There are occasions when it is necessary to estimate inventory. For-example when goods are lost or due to theft, a brokerage or natural deterioration or evaporation.
There are two common approaches to estimate stock;
  1. Gross profit method
  2. Retail method
  1. GROSS PROFIT METHOD
This method of estimation uses Gross profit margin or average mark up in order to determine the cost of goods sold (cost of sales).
*Margin = profit/selling price.
* Mark up = profit/cost price.
ILLUSTRATION 1
ABC LTD TRADING A/C FOR THE YEAR ENDED 30/06/2009
Sales
780,000
less; Return inwards
30,000
750,000
less; cost of goods sold
opening stock
120,000
Add; purchases
660,000
780,000
less; closing stock
180,000
600,000
Gross profit
150,000
Calculate;
  1. Gross margin in percentage
  2. Average mark up in percentage
Solution;
  1. Gross profit margin = profit/selling price x 100%
EcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - STOCK VALUATION
= 25%
ILLUSTRATION 2
Assume in illustration (i.) in the previous page during July, August, September ABC has made;
Purchases 240,000
Net sales 350,000
Calculate inventory on 30th September, use gross profit method to estimate the
Given data;-
Stock as at 30th/6 180,000
Purchases 240,000
Sales 350,’000
Margin 20%
Calculate closing stock.
sales
350,000
Opening stock
180,000
Add purchases
240,000
cost of goods available for sale
420,000

less Closing stock
140,000
Cost of goods`sold
Gross profit
70,000
ILLUSTRATION 3
On 1st January 2004, J.M valued his stock at cost, 12,300. During the first week of January 2004, his transactions in his stock were as follows;
Purchases 8,100
Sales 13,600
Returns inwards 800
Returns outwards 300
He sells his goods at 25% above cost of goods available for sale.
Calculate the cost of his stock at 7th January 2004
Sales
13,600
less Return inwards
800
12,800
less cost of goods sold
Opening stock
12300

Add purchases
8100
20,400
less Returns outwards
300
Cost of goods available for sale
20100
less; closing stock
9860

Cost of goods sold.
10,240
Gross profit
2560

Gross profit P2?800x
Chane mark-upMargin
25% 20%
20%x12,800Gross profit Tshs 2560


RETAIL METHOD
  • This estimation technique is employed to business with large amount of stocks of relatively low unit’s values.
  • Usually all items are quoted at retail prices
Example of business using retail method is;
  1. Large chain store
  2. Supermarket
This method employs the following steps;
  1. obtain the cost of goods available for sale
  2. if sales figure is given taking the value of goods available for sale at retail the sales figure should give the value of closing stock at retail
  3. the value of closing stock at retail can be converted to an approximate cost figure by using the ratio of cost retail value worked out at (a) above.
ILLUSTRATION
On 1st June; COST RETAIL
Opening stock 180,000 288,000
30th purchases 145,000 212,000
30th sales ─ 170,000
Calculate;
  1. cost retail ratio
  2. closing stock at retail value
  3. Conversion of closing stock at retail value to cost.
Solution
Cost to retail ratio
COST RETAIL
Opening stock 180,000 288,000
Add; purchases 145,000 212,000
325,000 500,000
Ratio = cost/Retail x 100
= 325,000 x 100
500,000
= 65%
Closing stock at retail value
COST
RETAIL
Opening stock
180,000
288,000
Add; purchases
145,000
212,000
325,000
500,000
Less; Net sales
170,000
Closing stock
330,000
Conversion of closing stock at retail value to cost
Closing stock = 330,000
65 x 330,000
100
= 214,000

Conversion of closing stock = 214,000




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EcoleBooks | ACCOUNTANCY A LEVEL(FORM SIX) NOTES - STOCK VALUATION

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