2nd Edition by Edwin Olima FCCA
We have now reached the end of our trading period and we should find out the how many items of goods we have not yet sold and also put a value on them. To do this carry out the following steps:
Step 1. Go through the purchase invoices for traded goods (computers in this case) and also the sales invoices and credit note for the goods and list the stock quantities out in date order in the table below. The first two have been done:
Stock Record: 1333 GHZ Computers
Goods In – Purchased or returned
Goods Out – Sold
D = A + B - C
10 Jan 3000
15 Jan 3000
( 4 )
Step 2. You should be left with 3 computers unsold. These will be valued at £500.00 each (see the last purchase invoice dated 2 Aug 3000 ) to give you a total stock value of £1,500.
Now compare your answer to the one in the answer section of the book.
The main assumption in the above valuation exercise is that the first batch of goods in are sold out before the next batch of goods in. In accounting terminology this is called the First in First out (FIFO ) method of valuing stock. One could say that this is the traditional and most commonly used method. However you should note that there are other valuation methods depending on the type of business and the type of product being traded. Here again your business adviser can help you with the most appropriate method for your business.
In our example we have only used one type of stock and it is easy to create the above table. In practice, businesses with lots of stock items would need stock records in respect of each item of stock. These records would add stock brought in to shop (or warehouse) and deduct from this the quantity of stock going out as sales. The balance of stock at the end of the period would then be valued according to the latest purchase invoice values (assuming FIFO ).
It is important to verify the balance of stock items that the records show as stock of goods at the period end. To do this, a business would carry out a stock take . The quantity ascertained during the stock take should in theory match the balance of goods shown by the stock records.
In practice some businesses do a stock take at the end of each period to determine the closing stock of goods rather than keep detailed stock records. The disadvantage of this is that one may not know if stocks have been misappropriated. The advantage being less administration work.