This document discusses periodic and perpetual inventory systems as well as FIFO, LIFO, and average cost methods for valuing inventory. Under a periodic system, inventory is only updated at the end of the year, while a perpetual system continuously updates inventory with purchases and sales. FIFO assigns the earliest costs to cost of goods sold, LIFO the latest costs, and average uses the average cost. The document provides examples and compares the implications of each inventory valuation method.

1. Course:
Cost And Managerial Accounting.
Topic:
System and Method Of Stock Inventory.
Batch:
BBA
Instructor:
Sir Rafiq
Group Members:
Ayesha Urooj
Komal Amjad
Fariya Zainab

2. System Of Stock Inventory
A. Periodic
B. Perpetual
A. Periodic inventory system:
Under this system the amount appearing in
the Inventory account is not updated when purchases of
merchandise are made from suppliers. Rather, the
Inventory account is commonly updated or adjusted only
once—at the end of the year. During the year the
Inventory account will likely show only the cost of
inventory at the end of the previous year.
B. Perpetual inventory system:
Under this system the Inventory account is continuously
updated. The Inventory account is increased with the
cost of merchandise purchased from suppliers and it is
reduced by the cost of merchandise that has been sold
to customers. (The Purchases account(s) do not exist.)

3. Methods Of Stock Inventory
 FIFO
 LIFO
 AVERAGE
FIFO( first in, first out):
FIFO stock valuation assumes that the first one purchased
was the first one sold. The earliest goods purchased are
first to be recognised as cost of goods sold. Ending
inventory is calculated on the latest units produced. The
latest prices used for the FIFO methods gives highest
valuation of stock and the highest gross profit.
LIFO( last in, first out):
LIFO stock valuation assumes that the last one purchased
was sold first. The cost of the latest goods purchased are
the first to be assigned to cost of goods sold. Ending
inventory is calculated on the oldest units produced. LIFO
value inventory on older prices give the lowest value on
stock and profit.
Average:
This method make no assumption about the movement of
stock. That the goods available for sale have the same
average cost per unit

4. Examples
First In, First Out (FIFO):
The FIFO method removes your oldest items from inventory first.
If you bought 10 items in January at $1, 10 more in April at $2,
and 10 more in July at $3, then sold 15 total during the year, your
cost of goods sold would be $20. The first 10 items you bought
cost $1 each ($10 total), and the next five cost $2 each ($10
total). Your remaining inventory (the 15 unsold items) would be
valued at 5 x $2 + 10 x $3 = $40.
FIFO gives you the advantage of having your stated inventory
value (what's available for sale) closely match current prices.
Last In, First Out (LIFO)
LIFO is the opposite of FIFO. Your newest items come out of
inventory first. In the above example, your cost of goods sold is
now $40 — the last 10 items you bought cost $3 each ($30 total),
and the five before that cost $2 each ($10 total). Your remaining
inventory would be based on the first 15 items you bought for a
value of 10 x $1 + 5 x $2 = $20.
With LIFO, your costs of goods sold (what you already sold)
closely matches current prices. Because costs generally rise,
LIFO also allows you to deduct a larger cost from your taxes and
lowers potential write-downs from unsold inventory.
Average
The average cost method takes your average cost during the
period and assigns it to all items. In the above example, the
average purchase price is $2. The cost of goods sold for your 15
sold items is $30. The inventory value for your unsold 15 items is
also $30.
The primary benefit to the average cost method is that it smooths
out price fluctuations.

5. Issue FIFO Method LIFO Method
Materials
flow
In most businesses, theactual
flow of materials follows FIFO,
which makes this a logical
choice.
There are few businesses where
the oldest items are kept in stock
whiler newer items aresold first.
Inflation If costs areincreasing, the first
items sold are the least
expensive, so your costof goods
sold decreases, you report more
profits, and therefore pay a
larger amountof income taxes
in the near term.
If costs areincreasing, the last
items sold are the most
expensive, so your costof goods
sold increases, you report fewer
profits, and therefore pay a
smaller amount of income taxes
in the near term.
Deflation If costs aredecreasing, the first
items sold are the most
expensive, so your costof goods
sold increases, you report fewer
profits, and therefore pay a
smaller amount of income taxes
in the near term.
If costs aredecreasing, the last
items sold are the least
expensive, so your costof goods
sold decreases, you report more
profits, and therefore pay a
larger amountof income taxes in
the near term.
Financial
reporting
There are no GAAP or IFRS
restrictions on the use of FIFO in reporting
financial results.
IFRS does not all the use of the
LIFO method at all. The IRS allows
the useof LIFO, butif you use it
for any subsidiary, you mustalso
use it for all parts of the
reporting entity.

6. Record
keeping
There are usually fewer
inventory layers to track in a
FIFO system, sincetheoldest
layers are continually used up.
This reduces record keeping.
There are usually more inventory
layers to track in a LIFO system,
since the oldest layers can
potentially remain in the system
for years. This increases record
keeping.
Reporting
fluctuations
Since there are few inventory
layers, and those layers reflect
recent pricing, there are rarely
any unusualspikes or drops in
the costof goods sold that are
caused by accessing old
inventory layers.
There may be many inventory
layers, somewith costs froma
number of years ago. If one of
these layers is accessed, it can
result in a dramatic increase or
decrease in the reported amount
of costof goods sold.