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Stock Valuation

The document discusses the differences between the first-in-first-out (FIFO) and last-in-first-out (LIFO) methods of stock valuation. FIFO assumes the oldest units in inventory are sold first, meaning the cost of goods sold reflects the cost of the earliest items purchased and the ending inventory reflects the most recent costs. LIFO assumes the newest items are sold first, so the cost of goods sold reflects the most recent costs and ending inventory the earliest costs. The key differences are that FIFO provides a more accurate current market value for inventory, while LIFO provides a lower taxable income during inflation. However, LIFO is not recommended under International Financial Reporting Standards.
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0% found this document useful (0 votes)
41 views6 pages

Stock Valuation

The document discusses the differences between the first-in-first-out (FIFO) and last-in-first-out (LIFO) methods of stock valuation. FIFO assumes the oldest units in inventory are sold first, meaning the cost of goods sold reflects the cost of the earliest items purchased and the ending inventory reflects the most recent costs. LIFO assumes the newest items are sold first, so the cost of goods sold reflects the most recent costs and ending inventory the earliest costs. The key differences are that FIFO provides a more accurate current market value for inventory, while LIFO provides a lower taxable income during inflation. However, LIFO is not recommended under International Financial Reporting Standards.
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AN ASSIGNMENT

ON
COURSE TITLE: COST ACCOUNTING
COURSE CODE: ACC 212
TOPIC:
DISCUSS WHY FIRST-IN-FIRST OUT METHOD OF STOCK
VALUATION IS DIFFERENT FROM LAST-IN-FIRST OUT METHOD
OF STOCK VALUATION.

PREPARED BY:
S/N NAMES MATRIC NO

1 OLADIMEJI AISHAT BS20210205965


2 KOLAWOLE TOHEEB .L BS20210201525
3 OJO SOLOMON .O BS20210205875
4 OWOLABI ADIJAT .A BS20210205365
5 OLAYIWOLA FATIMOH .O BS20210206015
6 ADERIBIGBE ABDULLATEEF .A BS20210205955
7 SHEU MARIAM .A BS20210205285
8
9
10
11
12

SUBMITTED TO:
MR BABAJIDE.O
LECTURER –IN-CHARGE

BUSINESS ADMINISTRATION AND MANAGEMENT DEPARTMENT


THE FEDERAL POLYTECHNIC EDE OSUN STATE
JUNE 2023.
Stock Valuation
First in first out (FIFO) method
An asset management technique, in which the actual issue or sale of
goods from the stores is made from the oldest lot on hand is known as
First in, first out or FIFO. It follows a chronological order, i.e. it first
disposes of the item that is placed in the inventory first. That is why this
method of inventory valuation is regarded as the most appropriate and
logical one. Hence used by most of the business persons in maintaining
their inventory.

If the goods are perishable in nature, then they will get obsolete soon, so
it would be beneficial that the earliest stock should be handled first which
minimizes the risk of obsolescence. Therefore, the leftover stock in hand
will ultimately show the most recent stock that is at the present
market price.

The method is considered as most suitable one when there is a fall in


the prices because the cost that is charged to production will be higher
than the replacement cost. However, if the prices are high the same
condition will get reversed and as a result, it is not easy to order the
same quantity of materials without having sufficient funds.

Advantages of First in First out (FIFO) Costing Method:


1. It is based on a realistic assumption that materials are issued in the order loss
of the receipts.
2. Materials are issued at actual cost and thus no unrealistic profit or arises from
the operation of this method.
3. This method is easy to understand and simple to operate.
4. The value of closing stock will reflect current market.
5. If purchase are few and if the prices are of materials remain stable price. The
method will be simple to operate.
6. This method is useful when prices are falling.
7. It is a logical method because it taken into consideration the normal
procedure of utilizing first those materials which are received first.
Disadvantages of First in First out (FIFO) Costing Method:
This method suffers from the following disadvantages:
1. It involves complicated calculations and hence increases the possibility of
clerical errors.
2. For pricing one requisition more than one price has often to be taken.
3. When prices rise the issue price does not reflect the market prices as
materials are issued from the earliest consignments.
4. In case of fluctuations in prices of materials, comparison between one job and
the other job becomes difficult because one job started a few minutes later than
another of the same nature may be issued at different prices.
5. During the period of falling prices cost of production tends to be high. This
may lead to cancellation of prospective sales because of high quotation.

FIFO method is recommended whenever:


1. The size and cost of units are large.
2. Materials are easily identified as belonging to a particular purchased lot.
3. Not more than two or three different receipts of the materials are on a
materials card at one time.

Last in first out (LIFO) method


The last in first out (LIFO) method of costing materials issued is based on the
premise that materials units issued should carry the cost of the most recent
purchase, although the physical flow may actually be different.

Last in, first out or LIFO, is a method of accounting for valuing inventory.
This method is based on the assumption that the last item placed in
the inventory will be sold out first, i.e. reverse chronological order will be
followed in issuing inventory from the stores.

At the time of inflation in the economy, the value of the unsold stock will
be low, while the value of the cost of goods sold will be high, which will
ultimately result in low profit and income tax as well. Whereas in
deflationary conditions, the whole scenario will get reversed due to fall in
the general price level, resulting in higher profits and income tax.
Although, the assumption is proved illogical and contradictory to the
movement of inventory in the business organization. By virtue of this,
LIFO method is no longer adopted for valuing inventory.

Advantages of Last in First Out (LIFO) Method:


1. This method is also quick and simple to operate particularly when prices are
fairly steady.
2. Under this method materials are charged to production at the latest prices
paid.
3. Under this method, in times of rising prices, quotation of prices for company
product will be safe and profitable.
4. This method like FIFO. Does not result in any unrealistic profit or loss.

5. This method is easy to operate where purchase are made frequently less
frequently.
6. Due to the effect of inflation in the cost of production, the reduced profit
margin results in saving of lax.

Disadvantages of the LIFO Costing Method:


The disadvantages or limitations of the last in first out costing method are:
1. LIFO is not deemed an acceptable stock valuation based on International
Accounting Standards
2. Record keeping requirements under this method, as well as FIFO, are
substantially greater than those under alternative costing and pricing methods.
3. Inventories may be depleted due to unavailability of materials to the point of
consuming inventories valued at older or perhaps the oldest prices. This
situation will create a miss matching of current revenue and cost, sometimes
companies using this costing method counteract this problem by establishing an
allowance for replacement of the LIFO inventory account. Cost of goods sold is
charged with current cost. The allowance account is credited for the access of
the current replacement cost over the LIFO carrying cost for the inventory
temporarily liquidated. When this inventory is replenished, the temporary
allowance (credit) is removed and the goods acquired are placed in inventory at
their old last in first out cost.
Comparison Chart

BASIS FOR
LIFO FIFO
COMPARISON
Meaning LIFO is an inventory FIFO is an inventory
valuation technique, in which valuation technique, in which
the last received stock of the first received stock of
goods is issued first. goods is issued first.
Stock in hand Represents the oldest stock Represents the latest stock
Current market Shown by the cost of goods Shown by the cost of unsold
price sold stock
Restrictions IFRS, does not recommend No such restriction
the use of LIFO for valuing
the inventory in accounting.
Inflation Income tax shows minimum In inflationary condition,
amount, when there is income tax shows a higher
inflation in the economy. amount.
Deflation In case of deflation, larger Reduced income tax will be
amount of income tax is shown in deflationary
shown. conditions.

Differences Between LIFO and FIFO


The points given below explain the fundamental differences between
LIFO and FIFO methods of inventory valuation:

1. A method of stock valuation in which last received lot in hand is


issued first is known as LIFO. FIFO is a short form for First in, first
out in which the inventory produced or purchased first, is disposed
off or sold out first.
2. In LIFO, the stock in hand represents, oldest stock while in FIFO,
the stock in hand is the latest lot of goods.
3. In LIFO, the cost of goods sold (COGS) shows current market
price while in the case of FIFO the cost of unsold stock shows
current market price.
4. As per International Financial Reporting Framework, LIFO method
is not permissible for valuing inventory, which is not in the case of
a FIFO.
5. When there is an inflationary trend in the country’s economy, LIFO
will show a correct profit and thus help in tax saving. However, it is
just opposite in FIFO.
6. In FIFO, a little number of records are being maintained, unlike
LIFO.

Implication

FACTORS FIFO METHOD LIVO METHOD

Increasing Prices:
Higher Lower
1. Material cost
Lower Higher
2. Closing stock
Decreasing Prices:
Lower Higher
1. Material cost
Higher Lower
2. Closing stock

Conclusion
Both the methods LIFO and FIFO has its pros and cons. LIFO does not inflate
profits when the prices of products are rising, but there are complications in this
method. Due to irrational assumptions, LIFO is not used nowadays as it handles
the latest stock in hand first which is unfair because the earliest stock stands in
the queue. FIFO is very simple to understand as well as to operate. It shows the
correct picture when there is a fall in the prices of goods.

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