IB Business and Management ACCOUNTS & FINANCE 3.5 FIFO and LIFO Stock

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IB Business and Management ACCOUNTS & FINANCE: 3.5 Financial Accounts FIFO and LIFO Stock Valuation

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IB Business and Management .com IB Business and Management T he IB Diploma Business and Management course delivered IN STYLE , ONLINE . ©

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z Stock valuation Stock is purchased. Stock is sold. The stock on hand needs to be valued as it’s a current asset HL

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z Stock valuation Valuing the firm’s inventories for the trading account Often a firm’s stocks will consist of the same goods , bought at different times & at different purchase prices HL

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z Stock valuation HL Had 6 left over from 2010 Bought 50 in jan @ $25 Bought 10 in feb @ $30 Bought 100 in march @ $20 Sold 130 between jan -march What’s the value of closing stock???

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z Stock valuation HL Stock rotation is important for perishable stocks f irst i n f irst o ut Cost of goods sold = opening stock + purchases – closing stock ↓ value of closing stock  ↑ cost of goods sold  ↓ gross profit  ↓ company tax paid Gross profit = sales revenue - cogs 5,000 44,000 76,000 Stock bought earlier is usually purchased for less l ast i n f irst o ut

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z Fifo vs. lifo HL Date Stock bought Stock issued Remaining stock Stock valuation 1 st Mar 30 tyres @ $25 30 tyres @ $25 $750 5 th Mar 20 tyres @ $25 10 tyres @ $25 $250 8 th Mar 20 tyres @ $30 10 tyres @ 25 20 tyres @ $30 $250 $600 $850 10 th Mar 15 tyres @ $30 10 tyres @ $25 5 tyres @ $30 $250 $150 $400 l ast i n f irst o ut (FIFO = 10 @ $25 + 5 @ $30) Date Stock bought Stock issued Remaining stock Stock valuation 1 st Mar 30 tyres @ $25 30 tyres @ $25 $750 5 th Mar 20 tyres @ $25 10 tyres @ $25 $250 8 th Mar 20 tyres @ $30 10 tyres @ 25 20 tyres @ $30 $250 $600 $850 10 th Mar 10 tyres @ $25 5 tyres @ $30 15 tyres @ $30 $450 $450 15 tyres

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z Fifo vs. lifo Trading Account for Tyres-R-Us (up to 10 th March) FIFO ($) LIFO ($) Sales 1,750 1,750 Cost of goods sold: Purchases 1,350 1,350 Less Closing Stock 450 400 900 950 Gross Profit 850 800 Closing stock lower Therefore C.o.g . higher & Gross profit lower HL

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z Lifo / fifo HL Profit & Loss Account for BWC (Jan-Feb: Simplified) LIFO ($,000) FIFO ($,000) Sales 60 60 Cost of goods sold: Opening Stock 9 9 Purchases 33 33 Less Closing Stock 9 12 33 30 Gross Profit 27 30 Month Stock purchased (units) Cost per unit ($) Stock issued (units) Value of stock purchased ($) Jan 1,000 10 1,000 10,000 Feb 1,000 11 1,000 11,000 Mar 1,000 12 1,000 12,000 Total 3,000 33,000 Note : opening stock as at 1 st jan = 1,000 units at $9 each Exam question: Using lifo & fifo stock valuation methods, construct a profit & loss account to show the effects on BWC’s trading profit [6 marks] Note : market price = $20 per unit

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z Lifo / fifo HL Profit & Loss Account for BWC (Jan-Feb: Simplified) LIFO ($,000) FIFO ($,000) Sales 60 60 Cost of goods sold: Opening Stock 9 9 Purchases 33 33 Less Closing Stock 9 12 33 30 Gross Profit 27 30 Month Stock purchased (units) Cost per unit ($) Stock issued (units) Value of stock purchased ($) Jan 1,000 10 1,000 10,000 Feb 1,000 11 1,000 11,000 Mar 1,000 12 1,000 12,000 Total 3,000 33,000 Note : opening stock as at 1 st jan = 1,000 units at $9 each Exam question: Using lifo & fifo stock valuation methods, construct a profit & loss account to show the effects on BWC’s trading profit [6 marks] Note : market price = $20 per unit

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z Lifo / fifo Date Stock purchased Stock issued Closing stock older newer HL 1 Feb 2013 There were 10 TVs in stock 1 st Feb bought @ $190 each 10 @ $190 2 Feb 10 TVs purchased @ $200 each 2 Feb 2013 10 @ $200 10 @ $190 10 @ $200 5 Feb 10 TVs sold 5 Feb 2013 10 @ $200 10 @ $190 7 Feb 50 TVs purchased @ $220 each 7 Feb 2013 50 @ $220 10 @ $190 50 @ $220 9 Feb 40 TVs sold 9 Feb 2013 40 @ $220 10 @ $190 10 @ $220 16 Feb 100 TVs purchased @ $250 each 16 Feb 2013 100 @ $250 10 @ $190 10 @ $220 100 @ $250 21 Feb 80 TVs sold 21 Feb 2013 80 @ $250 10 @ $190 10 @ $220 20 @ $250 purchases Value of closing stock

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z There were 10 TVs in stock 1 st Feb bought @ $190 each Lifo / fifo Date Stock purchased Stock issued Closing stock older newer HL 1 Feb 2013 10 @ $190 2 Feb 2013 10 @ $200 10 @ $190 10 @ $200 5 Feb 2013 10 @ $190 10 @ $200 7 Feb 2013 50 @ $220 10 @ $200 50 @ $220 9 Feb 2013 1 0 @ $200 20 @ $220 16 Feb 2013 100 @ $250 20 @ $200 100 @ $250 21 Feb 2013 20 @ $220 40 @ $250 2 Feb 10 TVs purchased @ $200 each 5 Feb 10 TVs sold 7 Feb 50 TVs purchased @ $220 each 9 Feb 40 TVs sold 30 @ $220 16 Feb 100 TVs purchased @ $250 each 21 Feb 80 TVs sold 60 @ $250 purchases Value of closing stock

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z HL Profit & Loss Account for BWC (Jan-Feb: Simplified) LIFO ($,000) FIFO ($,000) Sales 52 52 Cost of goods sold: Opening Stock 1.9 1.9 Purchases 38 38 Less Closing Stock 9.1 10 30.8 29.9 Gross Profit 21.2 22.1 TVs sold at $400 each Lifo / fifo Less gross profit = less company tax paid

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