Methods of inventory valuation include first in first out (FIFO), last in first out (LIFO), and weighted average cost (AVCO). FIFO assumes the earliest goods purchased are sold first and values ending inventory at the latest prices. LIFO assumes the latest goods purchased are sold first and values ending inventory at older prices. AVCO makes no assumptions about inventory movement and values goods based on the weighted average unit cost. The method used affects ending inventory valuation and calculated profits.

1. Methods of inventory valuation
Section 10
Objectives 6 and 7
(a) List methods of inventory valuation
(b) Calculate the value of closing
inventory
(c) Assess the effect of different
methods of inventory valuation on
profit

2. Methods of inventory valuation
• Reasons for valuing unsold inventory:
• Business owners value unsold stock at the
end of each financial year so that he or she
can calculate the gross profit or loss made on
sales
• The ending inventory figure is needed to
derive the cost of goods sold, as well as the
ending inventory balance to include in a
company's balance sheet.

3. • Look at the following video explaining
the concept of ending inventory
Calculate Ending Inventory:
Formula & Explanation
Study.com
http://study.com/academy/lesso
n/calculate-ending-inventory-
formula-lesson-quiz.html

4. Methods of inventory valuation
– Businesses may value year end inventory by using
different methods
– It is important to value stock using the same
method. Using different methods, will produce large
differences in calculating profits
– These methods are
• First in first out (FIFO)
• Last in first out (LIFO)
• Weighted average cost (AVCO)

5. • This method assumes
– that the first goods bought are the first goods to be
sold
– The earliest goods purchased are the first to be
recognised as cost of goods sold
– Ending inventory is calculated on the latest units
purchased
– The latest prices used for the FIFO method gives
the highest valuation of stock and the highest gross
profit
First in first out (FIFO)

6. • Look at the video on the next slide and watch
FIFO Inventory method
FIFO inventory method
Education Unlocked
https://www.youtube.com/watch?v=Wa83L8TvoaM

7. • This method assumes
– That the last goods bought are the first goods to be
sold
– The costs of the latest goods purchased are the first
to be assigned to cost of goods sold
– Ending inventory is calculated on the oldest units
purchased
– LIFO value inventory on older prices give the lowest
value on stock and profit
Last in first out (LIFO)

8. • Look at the video on the next slide
and watch LIFO inventory method
LIFO Inventory method
Education Unlocked
https://www.youtube.com/watch?v=zLAvpS6o25E

9. • This method makes no assumption about
the movement of stock.
• It assumes
– That the goods available for sale have the
same average cost per unit
– The goods available for sale is allocated on
the basis of the weighted average unit cost
– The formula used to calculate the unit cost is
• Total value of goods on hand (goods available for
sale) ÷quantity of goods on hand
Weighted average cost (AVCO)

10. Methods of inventory valuation
• The formula to determine the value
of closing inventory is
Average cost per unit x
remaining units

11. Methods of inventory valuation
• Look at the video on the next slide
on Average Cost inventory
Average Cost inventory method
Education Unlocked
https://www.youtube.com/watch?v=qAWVVw-dC5A

12. Advantages of each of the inventory
valuation methods
FIFO LIFO AVCO
1. Assumes that goods are
issued in the order they are
received
1. Assumes that goods
received last are issued first
1. Makes no assumption
about how goods are issued
2. Closing stock is valued
on the most recent prices
2. Closing stock is valued
on the earlier prices
2. Average price is mainly
affected by the amount
bought at the different price

13. • Disadvantages of each of the inventory
valuation methods
FIFO LIFO AVCO
If prices are rising, closing
stock is valued at the latest
prices
If prices are falling, profits
will be high
A new average must be
calculated with every
purchase