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Stock valuation

Valuation of stock-in-trade for accounting purposes. Where any one business is concerned, the most important thing is consistency. There are various methods of valuation, among them: (1) unit-cost: the fundamental method – each item is priced at its actual cost; (2) F.I.F.O. (‘first in first out’): goods are priced on the assumption that the first goods purchased are the first goods used and therefore that stock-in-hand should be valued at current prices; (3) average cost: goods are valued by averaging the cost of goods brought forward, with the cost of goods purchased during the accounting period; (4) standard cost: a predetermined or budgeted cost per unit; (5) L.I.F.O. (‘last in first out’): goods are valued on the assumption that those purchased most recently are the first to be used, and that the goods in stock are likely to be old and so will not be valued at the current buying price, but at the first recorded cost of purchase; (6) base stock: often used in retail businesses the assumption is that stock is constant in quantity and therefore given a fixed value, based on its original cost, this value being used for all accounting purposes; (7) adjusted selling price: sometimes used in retail businesses – stock is valued at selling price less expected profit and selling expenses. None of these methods is entirely satisfactory. Where the present selling price of the stock is less than the figure any valuation method reveals, the selling price should be used instead.

Reference: The Penguin Business Dictionary, 3rd edt.