STOCK VALUATION/ INVENTORY VALUATIO: FIRST IN FIRST OUT (FIFO), LAST IN FIRST OUT (LIFO), WEIGHTED AVERAGE

STOCK VALUATION/INVENTORY VALUATIONM

(FIFO/LIFO/WEIGHTED AVERAGE)

Inventories otherwise known as stocks as defined by IFRS are goods held for sale or held production process or as finished goods. Inventories include goods which may be in the form of raw materials, work in progress or finished goods held by the manufacturers, wholesalers or retailers.

Inventory Valuation

Inventory valuation or stock valuation as called by some refers to the amount by which inventories/stocks are to be recognized in the book of account. The accounting standard that discussed about inventory is International Accounting Standard 2 (IAS 2).

Methods of Calculating Inventories

There are different methods of calculating inventories/stocks, the most common ones are:

1.     First In First Out (FIFO)

2.     Last In First Out (LIFO)

3.     Weighted Average

FIRST IN FIRST OUT (FIFO)

First In First Out (FIFO) simply means that the stocks or inventories (goods or materials) that are stored fist should be the first to be supplied out of the store for sales or production of goods. That is, the oldest stocks or inventories should be the first to be sold or used in the case of production process.

Example

Abiodun deals with the sales of bags, on the 1^st of May, 2021, he bought 10 bags at N2,000 per bag.  By the 7^th of May, the price of the bag has increased to N2,500 and he ordered for 7 bags.

On the 15^th of May, a customer requested for12 bag from Abiodun. Using First In First Out (FIFO) method, calculate the cost price of the 12 bags?

Solution

To calculate the cost of the 12 bags using FIFO methods, the bags will be taking from the first stocks/inventories which are 10 bags in total while the remaining (which is 2) will be taking from the prior inventories.

Thus cost of the 12 bags = 10 bags at N2,000 + 2 bags at N2,500

                             = 10 x N2,000 + 2 x 2,500

                             = N20,000 + 5,000

                             = N25,000

LAST IN FIRST OUT (LIFO)

Last in First Out which is always abbreviated as LIFO is the opposite of First in First Out (FIFO). This method indicates that the last inventories or stocks should be the first to be supplied out of the store. That is, the recently received inventories or stocks should be the first to be moved out of the store.

Example

Using the stock or inventory record of Abiodun, calculate the cost of inventories supplied using LIFO method.

Solution

LIFO method has to do with the supply of the stock or inventory from the most recent inventories/stocks. The last inventories received by Abiodun are 7 bags at N2,500 which are not up to the required 12 bags. So, the remaining 5 bags will be taking from inventories before that which is from the stock of 10 bags.

Therefore, cost of the 12 bags  = 7 bags at N2,500 + 5 bags at N2,000

                                                       = 7 x N2,500 + 5 x N2,000

                                                       = N17,500 + N10,000

                                                      = N27,500

WEIGHTED AVERAGE METHOD

Under the weighted average method, the average cost of the stocks/inventories will be calculated to determine the amount at which the stocks or inventories will be supplied. This can be determined by dividing the total cost by the total quantities as at that date.

Example

Using the records of stocks/inventories of Abiodun, calculate the cost of goods supplied using weighted average method,

Solution

Under this method, the value of the inventories will be summed up at each period while the average will be calculated when inventories are to be supplied.

As at 1^st of May, the cost of the 10 bags received at N2,000 per bag will be N20.000

On the 7^th of May, the cost of the 7 bags received at N2,500 per bag will be N17,500

The total quantities will be 17 (10 + 7) while the total cost will be N37,500 (20,000 + 17,500)

Average cost will be

                                 =

                                 = N2,206

 

If 12 bags are to be supplied by Abiodun, the cost of the bags will be calculated thus:

Cost of the 12 bags = 12 x N2,206

                                                       = N26,647

FORMAT STOCK VALUATION OR INVENTRY VALUATION ACCOUNT

STOCK/INVENTORY ACCOUNT
Date	RECEIPT			ISSUED			BALANCE
	Qty	Price	Value	Qty	Price	Value	Qty	Price	Value

           As seen in the diagram above, there are four major columns which are for dates, details of stocks or inventories received (Receipt), details of stocks or inventories supplied out of the store (Issued) and for balance of stocks or inventories remain in the store.

Note that the receipt, Issued and Balance columns contain sub columns where details of the stock or inventories such as the quantities, price and value are recorded.

FIRST-IN-FIRST-OUT (FIFO)

Having explained inventory or stock valuation using FIFO method above, we shall be taking an illustration (exercise) on inventory/stock transactions and prepare the inventory account using FIFO method.

ILLUSTRATION ON FIFO METHOD

Jumia Store started a cement business with 150 bags of cement at N2,000 per bag on the 1^st of January, 2022, during the month, the following transactions took place:

Jan., 3. Purchased 30 bags of cements at N2,100 per bag.

Jan., 8. Sold 40 bags.

Jan., 10. Purchased 25 bags at N2,200 per bag.

Jan., 15, sold 45 bags of cement.

Jan., 23. Bought 50 bags of cements at N2,500 per bag.

Jan., 27. Bought 20 bags at N2,700 per bag.

Jan., 30. Sold 40 bags of cement.

           You are required to prepare the store account using FIFO method.

SOLUTION

Workings

RECEIPT

Wrk 1: Jan 1, 50 bags at N2,000

            = 50 x N 2,000

            = N100,000

Wrk 2: Jan 3, 30 bags at N2,100

            = 30 x N2,100

            = N63,000

Wrk 4: Jan 10, 25 bags at N2,200

            = 25 x N2,200

            = N55,000

Wrk 6: Jan 23, 50 bags at N2,500

            = 50 x N2,500

            = N125,000

Wrk 7: Jan 27, 20 bags at N2,700

            = 20 x N2,700

            = 54,000

ISSUED

Wrk 3: Jan 8, 40 bags at N2,000

            = 40 x 2,000

            = N80,000

Wrk 5: Jan 15, 45 bags at N2,000, N2,100 & N2,200

            10 bags  at N2,000 = 10 x N2,000 = N20,000

            30 bags at N2,100 = 30 x N2,100 = N63,000

            5 bags at 2,200 = 5 x N2,200 = N11,000

            Total = N20,000 + N63,000 + N11,000

                               = N94,000

Wrk 8: Jan 30: 40 bags at 2,200 & 2,500

            = 20 bags at 2,200 = 44,000

            = 20 bags at 2,500 = 50,000

            Total = N44,000 + N50,000

= N94,000

JUMIA STORE INVENTORY/STOCK VALUATION ACCOUNT (FIFO METHOD)
Date	RECEIPT			ISSUED			BALANCE
	Qty	Price	Value	Qty	Price	Value	Qty	Price	Value
		N	N		N	N		N	N
01/01	50	2,000	100,000 (WRK 1)	-	-	-	50	2,000	100,000
03/01	30	2,100	63,000 (WRK 1)	-	-	-	80	2k/2.1k	163,000
08/01	-	-	-	40	2,000	80,000 (WRK 3)	40	2k,/2.1k	83,000
10/01	25	2,200	55,000 (WRK 1)	-	-	-	65	2k,/2.1k/2.2k	138,000
15/01	-	-	-	45	2k,/2.1k/2.2k	94,000 (WRK 5)	20	2,200	94,000
23/01	50	2,500	125,000 (WRK 1)	-	-	-	70	2.2k/2.5k	169,000
27/01	20	2,700	54,000 (WRK 1)	-	-	-	90	2.2k/2.5/ 2.7k	223,000
30/01	-	-	-	40	2.2k/2.5k	94,000 (WRK 8)	50	2.5k,/2.7k	129,000
	175		397,000	125		278,000

 

The total value at receipt side (N397,000) represents total stocks or inventories received into the store for the month while the total value at the issues side (N278,000) represents the total of stocks or inventories supplied (for sales or production process) out of the store. The closing value (N119,000) at the balance side is the closing stock/closing inventory for the month.

 

INVENTORY VALUATION USING LAST IN FIRST OUT (LIFO)

Unlike the FIFO method, in Last In First Out (LIFO) method, the stock or inventory movement is based on last stocks or inventories that are received into the store. The last inventories received into the store will be the first to be sold out in case of wholesale or retails business or supplied for production in case of a manufacturing company.

ILLUSTRATION ON LIFO

Jumia Store started a cement business with 150 bags of cement at N2,000 per bag on the 1^st of January, 2022, during the month, the following transactions took place:

Jan., 3. Purchased 30 bags of cements at N2,100 per bag.

Jan., 8. Sold 40 bags.

Jan., 10. Purchased 25 bags at N2,200 per bag.

Jan., 15, sold 45 bags of cement.

Jan., 23. Bought 50 bags of cements at N2,500 per bag.

Jan., 27. Bought 20 bags at N2,700 per bag.

Jan., 30. Sold 40 bags of cement.

           You are required to prepare the store account using LIFO method.

 

WORKINGS

RECEIPT

Wrk 1: Jan 1, 50 bags at N2,000

                   = 50 x N 2,000

                       = N100,000

Wrk 2: Jan 3, 30 bags at N2,100

                   = 30 x N2,100

                   = N63,000

Wrk 4: Jan 10, 25 bags at N2,200

                   = 25 x N2,200

                   = N55,000

Wrk 6: Jan 23, 50 bags at N2,500

                   = 50 x N2,500

                   = N125,000

Wrk 7: Jan 27, 20 bags at N2,700

                   = 20 x N2,700

                   = N54,000

 

ISSUED

Wrk 3: Jan 8, 40 bags

30 bags at N2,100 + 10 bags at N2,000

                   = 30 x 2,100 + 10 x 2,000

                   = N63,000 + N20,000

                   = N83,000

Wrk 5: Jan 15, 45 bags

25 at N2,200 + 20 bags at N2,000                                          

     = 25 x N2,200 + 20 x N2,000

           = N55,000 + N40,000

                 = N95,000

Wrk 8: Jan 30: 40 bags

= 20 bags at N2,700 + 20 bags at N2,500

        = 20 x N2,700 + 20 x N2,500

           = N54,000 + N50,000

           = N104,000

JUMIA STORE INVENTORY/STOCK VALUATION ACCOUNT (LIFO METHOD)
Date	RECEIPT			ISSUED			BALANCE
	Qty	Price	Value	Qty	Price	Value	Qty	Price	Value
		N	N		N	N		N	N
01/01	50	2,000	100,000	-	-	-	50	2,000	100,000
03/01	30	2,100	63,000	-	-	-	80	2k/2.1	163,000
08/01	-	-	-	40	2,000	80,000	40	2k/2.1k	83,000
10/01	25	2,200	55,000	-	-	-	65	2k/2.1k/2.2k	138,000
15/01	-	-	-	45	2k/2.1k/2.2k	94,000	20	2,200	94,000
23/01	50	2,500	125,000	-	-	-	70	2,200/2,500	169,000
27/01	20	2,700	54,000	-	-	-	90	2.2k/2.5k/2.7k	223,000
30/01	-	-	-	40	2.2/2.5k	104,000	50	2.5/2.7	119,000
	175		397,000	125		278,000

 

At the balance side, the closing balance of N1199,000 above represents the closing stock/closing inventories for the period while the sum of all the values at the receipt side which amounted to N397,000 represents the amount of stocks/inventories purchased during the period.

INVENTORY VALUATION USING WEIGHTED AVERAGE METHOD

Under         this method, the average cost of stocks/inventories are estimated to determine the amount at which the stock/inventory will be issued out. This could be calculated using the following formula:

Stock Valuation = Total Stock{inventory) value / Total Quantity of Stock (Inventory) x Quantity Supplied

The total stock/inventory and the total quantity of stock/inventory refer to the balance of inventory value and quantity as at that date. That is, total value of inventories in the store divided by the total number of inventories/stocks in the store.

ILLUSTRATION

Jumia Store started a cement business with 150 bags of cement at N2,000 per bag on the 1^st of January, 2022, during the month, the following transactions took place:

Jan., 3. Purchased 30 bags of cements at N2,100 per bag.

Jan., 8. Sold 40 bags.

Jan., 10. Purchased 25 bags at N2,200 per bag.

Jan., 15, sold 45 bags of cement.

Jan., 23. Bought 50 bags of cements at N2,500 per bag.

Jan., 27. Bought 20 bags at N2,700 per bag.

Jan., 30. Sold 40 bags of cement.

           You are required to prepare the store account using Weighted Average method.

 

WORKINGS

RECEIPT

Wrk 1: Jan 1, 50 bags at N2,000

                   = 50 x N 2,000

                       = N100,000

Wrk 2: Jan 3, 30 bags at N2,100

                   = 30 x N2,100

                   = N63,000

Wrk 4: Jan 10, 25 bags at N2,200

                   = 25 x N2,200

                   = N55,000

Wrk 6: Jan 23, 50 bags at N2,500

                   = 50 x N2,500

                   = N125,000

Wrk 7: Jan 27, 20 bags at N2,700

                   = 20 x N2,700

                   = N54,000

ISSUED

Wrk 3: Jan 8, 40 bags

Total Value before the date = N163,000

Total Quantity before the date = 80

Weighted Average = N163,000 / 80

                               = N2,038

40 bags will be 40 x N2,038

                          = N81,250

Wrk 5: Jan 15, 45 bags

Total Value before the date = N136,000

Total Quantity before the date = 65

Weighted Average = N136,000 / 65

                               = N2,100

45 bags will be 45 x N2,100

                          = N94,500

Wrk 8: Jan 30: 40 bags

Total Value before the date = N220,980

Total Quantity before the date = 90

Weighted Average = N220,098 / 90

                               = N2,455

40 bags will be 40 x N2,455

                          = N98,200

JUMIA STORE INVENTORY/STOCK VALUATION ACCOUNT (LIFO METHOD)
Date	RECEIPT			ISSUED			BALANCE
	Qty	Price	Value	Qty	Price	Value	Qty	Price	Value
		N	N		N	N		N	N
01/01	50	2,000	100,000	-	-	-	50	2,000	100,000
03/01	30	2,100	63,000	-	-	-	80	2,038	163,000
08/01	-	-	-	40	2,038	81,520	40	2038	81,480
10/01	25	2,200	55,000	-	-	-	65	2,100	136,480
15/01	-	-	-	45	2,100	94,500	20	2,100	41,980
23/01	50	2,500	125,000	-	-	-	70	2,385	166,980
27/01	20	2,700	54,000	-	-	-	90	2,455	220,980
30/01	-	-	-	40	2,455	98,200	50	2,455	122,780
	175		397,000	125		274,220

 

At the balance side, the closing balance of N122,780 represents the closing stock/closing inventory for the period. That is, the total amount of stocks/inventories left in the store. At the receipt side, the sum of all the values which totaled N397,000 represents the amount of stocks/inventories purchased during the period.