Stocktakes are a calculation of
the stock value at a given date. As a minimum they must be prepared at the
financial year end as they have a direct effect on the profit or loss of a
business but they can also be taken during the year, and indeed should be if
interim management profit and loss accounts are to be prepared.
They are valued either by cost
price or net realisable value (whichever is lower) most cases this is cost
price but there are times when the actual retail price will be lower than cost
price (IT retailers are an example where this might happen as the prices of IT
equipment comes down so if a retailer has bought something and not sold it then
it’s quite possible it would sell for less than cost price).
The normal methods of calculation
The most common is FIFO and unless
your business uses a different method I would suggest using FIFO. I always recommend
continuity in figures for a business so if you have been using a different
method then unless there are good business reasons to change the method stay
with what their doing (as long as they are not doing things incorrectly of
course). The good reason to use FIFO would be that in the majority of your prices will generally rise and this method gives the most realistic
value of the stock.
Comparison of stock values using FIFO, LIFO AND AVCO
Let’s assume that below are some
purchase and sales figures for a 2 month period for our client.
You can see that because the
purchase price rose then FIFO gives the highest stock value, LIFO gives the
lowest stock value and AVCO is somewhere between the two.