Methods of Stock Valuation
As with methods of depreciation, there is more than one way to calculate stock valuations. This is because in a great many instances it is not physically practicable to know exactly which items of stock have been used, so accountants use an approximation by maintaining records which are not consistent with the actual physical stock held. Periodically, at least once a year, these records are checked and reconciled with the actual stocks held.
There are three methods with which you need to be familiar, and these are First In First Out, Last In First Out and Average (the first two are usually referred to as FIFO and LIFO. ) They mean literally what they say. FIFO assumes that the first items purchase are the ones which are sold first, and LIFO means that the last items purchased will be treated as the first items sold. All you have to do is match items sold, to the items purchased and what is left is valued for closing stock. Average stock is found by adding up the purchases and dividing this total purchase price by the number of items purchased. This will give you the average unit price which you multiply by the number of items in closing stock to give you the closing stock value.
Date Description
Unit Unit Cost/Price
1.2.99 Purchase
10 10
1.6.99 Purchase
10 20
1.8.99 Purchase
10 30
1.10.99 Sold
15 50
Using the information above, prepare trading accounts using three
methods of Stock Valuation: FIFO, LIFO and Average and discuss the difference
in reported Gross Profit achieved.
The difference in the profits so calculated is purely due to the
different method used to value stock. 
FIFO Average
LIFO
Sales
750
750
750
Less Cost of Sales:
Purchases
600
600
600
Less Closing Stock 400
(200) 300
(300) 200
( 400)