Stock Valuation

1
Stock Valuation

• Accounting

2
Objectives

• Why?
• Three methods
• First In First Out (FIFO)
• Last In First Out (LIFO)
• Average Cost (AVCO)
• Profit Estimation

3
Why Value Stock

• Compare estimated and actual amounts (value)
• Profit derivation
• Asset derivation

4
Example (Stock Bought Sold)

• Bought
• January 10_at_30
• April 10_at_34
• October 20_at_40
• Sold
• May 8_at_50
• November 24 _at_60
• Total Purchases 1440 Sales 1840

5
What Stock Have We?

• 8 items
• Value?
• Value of goods remaining
• 30?
• 34?
• 40?

6
Valuation Methods

• Reduce Ambiguity
• FIFO
• LIFO
• AVCO

7
First In First Out (FIFO)

• First good received, first issued
• 8 goods _at_40
• Closing Stock 320

8
Last In First Out (LIFO)

• Last goods received, first issued
• Work backwards
• 8 goods _at_30
• Closing Stock 240

9
Average Cost (AVCO)

• Average Cost
• Recalculated every time goods are purchased
• 8 goods _at_37
• Closing Stock 296

10
Stock Valuation and Profit

• Method used will influence
• Gross Profit
• Net Profit

11
Factors Affecting the Stock Valuation Decision

• True and fair view
• Factors
• Ignorance of alternatives
• Convenience and Custom
• Taxation and Profit
• Remuneration
• Advice of auditors

12
Summary

• Three methods
• FIFO
• LIFO
• AVCO
• Choice profit calculations
• Factors influencing choice of method