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