Topic to be tested:
Mr. A was a junior accountant of Fine Company Limited (FCL) which is involved in the manufacturing and marketing of homogeneous products with the brand name of Dry Milk while facing the period of inflation. He had left his job due to his domestic issues and Mr. B has been hired as his replacement. While reviewing the company’s accounting records, Mr. B has come to know that there has been no consistent stock valuation policy in the past for valuing the company’s stocks. This had lead towards an inappropriate impact on the financial reporting in terms of inconsistent profitability and financial position.
He has discussed the matter with the chief accountant – Mr. C who told him that the company is in the process of implementation program of related IASs on various accounting issues. As there has been no application of IAS’s in the company, therefore, the inventory has been treated on many valuation techniques including LIFO, FIFO, weighted average, and some others keeping in view the convenience to the accountant.
Mr. B suggested applying an appropriate valuation policy so as to produce consistency in the financial reporting. He emphasized that it will let the company to present fair reporting of the company’s operation and performance in the coming financial statements. He argued that this will also match the inventory costs as per the current market prices, and the inventory will reflect fairly current market prices in the company’s balance sheet. After going through this meeting, Mr. B has been asked to prepare a preliminary report on the inventory valuation of the present stock held with the company while using the appropriate stock valuation method.
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Mr. A used FIFO method
Mr. B Used Average method
Mr. A aik complete policy se working nai kar rahey they. Wo kabi karty they or kabi nai or is liye wo FIFO method used kar rahey they. Or Mr.B ne jab a kar revalueation ki to in ko pata laga k ye to profitability both low hai to Mr.B ne piher is ko Mr.C se discuss kiya is tarah piher Mr.C ne suggestioin ki Mr.B ko k ab se ow aik Poperly method se kam kary to ab Mr.B ko pehly waley stock or current stock ko la kar chalna tha to is liye mr.B ne average method ka used kiya.
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The goods or merchandise kept on the premises of a business or warehouse and available for sale or distribution to customers is called Stock.
Inventory Valuation Methods:
FIFO (First in First Out):
This method assumes that the first goods acquired are the first goods sold. This results in cost of goods sold being charged with the earliest cost and ending inventory stated in terms of the most recent cost.
LIFO (Last in First Out)
This method assumes that the last goods purchased are the first sold. This approach charges cost of goods sold with the latest acquisition costs and ending inventory is valued at the cost of the first goods purchased. LIFO produces a better measure of net income than FIFO because the most recent (and accurate) inventory prices are charged against current revenues in cost of goods sold.
These methods assume that inventory valuation should be based on the average cost of all inventories available for sale during the period. A weighted average is used with periodic inventory systems and a moving average is used with perpetual systems.
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|First In/First Out (FIFO)||This method assumes that the first inventory items purchased or manufactured are the first items sold. With FIFO, the cost of the most recently acquired items are the costs associated with the ending balance. The ending inventory and value become the opening for the next period, also known as the carry forward method.|
|Last In/First Out (LIFO)||This method assumes that the last inventory items purchased or manufactured are the first items sold. The most recent inventory costs are assigned to the current period's cost of goods sold, leaving the oldest costs in the balance sheet account.
LIFO accounting is year-to-date, but you can use month-end calculations as check points. Opening inventory for LIFO is calculated at the end of the year, so the opening inventory is the same throughout the year.
LIFO accounting requires an understanding of inventory layers and inventory liquidation. Receiving or increasing inventory from one period end to the next results in a new LIFO layer. If a net decrease in inventory occurs from one period end to the next, no new layer is added. However, the prior period's layer is liquidated or reduced by the decrease amount.
|Weighted Average Cost||This method calculates the inventory on a weighted average of all the purchases. Sales order costs depend upon the current average cost, rather than the period cost.
In Average Cost accounting, the average cost for all receipts are calculated first without considering when the outgoing transaction occurred. The incoming transactions represent the true value of the stock, since this is what was paid for the items.
After all of the incoming transactions are calculated, the outgoing transactions are valued based on that amount to calculate the true cost of goods sold.
|Replacement/Current Cost||This method reflects the current value of inventory for a given period. In effect, it is the cost of replacing the inventory for a specific period. You can specify the cost that will be used during the valuation, instead of using a calculated cost.|
In accounting there are two common uses of the term stock. One meaning of stock refers to the goods on hand which is to be sold to customers. In that situation, stock means inventory.
The term stock is also used to mean the ownership shares of a corporation. For example, an owner of a corporation will have a stock certificate which provides evidence of his or her ownership of a corporation's common stock or preferred stock. The owner of the corporation's common or preferred stock is known as a stockholder.
Inventory valuation is basically providing a cost amount or a total dollar amount for the inventory that belongs within a business. Inventory valuation is accomplished in one of several ways beginning with the First In First Out method of valuation. This type of valuation allows a person to value the sales at the cost of materials that were bought during the earliest period and to value the goods or inventory at the cost of the most recent purchases of materials.