STOCK VALUATION METHODS

1.0 INTRODUCTION

Stocks (otherwise referred to as Inventories) are items of value held for use or sale by an enterprise and usually comprise raw materials and supplies used in production, work-in-progress and finished goods. Depending on the nature of an enterprise, the value of stocks may be substantial, surpassing or only second to that of property, plant and equipment. Appropriate classification and accurate determination of the quantity and cost of stocks are necessary for proper determination of the result of the operations of an enterprise and for the presentation of current assets in its balance sheet.

The use of several methods for valuing and reporting stocks gives rise to wide differences in the results of the operations of enterprises in the same line of business. Statement of Accounting Standard (SAS) 4 seeks to narrow such differences by setting a standard for the valuation and presentation of items of stock in the context of the historical cost concept. It also deals with the valuation and presentation of items of stocks including livestock and agricultural produce. It should be noted

that SAS 4 does not deal with valuation under the replacement cost accounting concept; inflation accounting concept; valuation of work-in- progress under long-term contracts; valuation of by-products and valuation of forest products.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. define Stock and explain reasons why stock must be kept 
2. know the several methods for valuing stock 
3. know the recommended methods for valuing stock as described in SAS 4 
4. prepare store ledger card using FIFO, LIFO and Average Method 
5. know the disclosure requirements on stock as stated in SAS 

4 3.0 MAIN CONTENT

3.1 Stock Valuation Methods

3.1.1 Types of Stock Taking

Like cash, stock can be kept for three purpose; transactionary, speculative and precautionary motives. Depending on the nature of items in stock, an organization can choose appropriate type of stock taking. Two systems of stock-taking are generally in use namely:-

1. Perpetual - under this system, up-to-date records are kept of quantity and type of items of stock received, issued and on hand. This system involves continuous physical count. 
2.  Periodic - under this system, records of quantity and type of items of stock are up-dated periodically after physical count. 

3.2 Valuation Methods

There is a number of factors to be considered in valuing materials issued for use in the store. Where purchase price are constant over a long period and there is no variation in quantities purchased, to any extent, there would be little difficulty. But in practice, prices fluctuate due to a number of reasons: due to inflation; changes in the world commodity prices; buying from different sources; differences in quantity discounts; etc. it is clear that there may be a number of identical materials in the store bought at different prices. When one of these materials is issued, it is necessary to determine the price at which it should be charged. The following valuation methods facilities the determination of both the quantity and the value of items of stock:-

1. Specific Identification: Under this method, items of stock specifically identified by particular attributes are assigned their values. 
2. Average: Under this method, the closing stock is assigned a value determined by a weighted average of the cost of opening stock and all acquisitions during the period. Calculation may be made on a continuous basis after each acquisition or at fixed intervals. 
3. First In, First Out (FIFO): This is a method of computing the value of closing stock based on the assumption that the first items in stock or acquired are the first ones used in production or consumed. 
4.  Last In, first out (LIFO): This is a method of computing the value of closing stock based on the assumption that the last items purchased are the first issued or consumed. 
5.  Standard Cost: This is a method of computing the value of closing stock based on a predetermined cost. For this method to reflect the actual cost, a system of allocation of variances as well as review of the standard cost must be in constant use. 
6.  Base Stock: Under this method, a minimum level of stock, carried at the historical cost of acquisition, is held at all times. However, any additions to or excesses over the base stock are carried at different bases such as FIFO, LIFO, etc. 
7.  Latest Purchase Price: Under this method, the value of closing stock is determined by applying the cost of the latest item purchased to the number of items on hand. 
8. . Adjusted selling price (retail inventory method): It is a method of determining the value of closing stock in which the historical cost of stock is estimated by applying the gross profit margin to the retail value of items or groups of items in stock. The amount so determined is then deducted from the retail price to arrive at the value of the stock. 

The selection of each of these methods is usually guided by the principle of matching of costs with revenue. The LIFO, latest purchase price and the base stock methods of valuation do not always adequately match costs with revenue because the value of stocks reported in the balance sheet is either overstated or understated, and the profit for the period is similarly distorted. In arriving at the values of stocks, a reporting enterprise should state its accounting policies with respect to these items. Generally, stocks should be valued at the lower of cost or net realizable value.

4.0 CONCLUSION

Stock constitutes one of the most important items of most business organizations, especially manufacturing organizations. Closing stock value is deducted from the cost of goods available in order to arrive at the gross profit; accurate valuation of stock influences the profit level as higher closing stock value gives higher gross profit, net profit and current asset. Thus, appropriate and accurate stock valuation is necessary in presentation of financial statements. This Unit addresses this issue in a modest way.

5.0 SUMMARY

The Unit gives highlights on the meaning of stock, purpose, types of stock taking, pricing methods, recommended methods of stock valuation and the disclosure requirements as stated by the Statement of Accounting Standard (SAS) 4 issued by the Nigerian Accounting Standards Board (NASB) in 1986. Four popular methods of valuing stock (FIFO, LIFO, Moving Average and Weighted Average) are also demonstrated to enable readers appreciate how those methods work in the determination of closing stocks values.