Difference between revisions of "How does FIFO affect Stock Value?"

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(Created page with "{{Incomplete}} == Summary == First-In-First-Out, commonly known as FIFO, is a means of valuing stock. This is the default method for all Platinum systems. == More Informatio...")
 
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=== Stock Value ===
 
=== Stock Value ===
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We use FIFO to value stock, as FIFO assumes that stock parts with the oldest costs are recognised first in the P&L as cost of goods sold (COS). The remaining inventory stock parts are then matched to the stock parts that are most recently purchased, and shown in Stock Value.
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On a FIFO basis, parts with the oldest costs are recognised first in the P&L as cost of goods sold (COS). The remaining inventory stock parts are valued by age to calculate the Stock Value.
  
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Stock parts are assigned a cost value, as items are received in through {{Menu|{{PO}}|Add,Edit,Process Purch. Orders}}. This is why it is important that you receive goods in at the correct cost price.  
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Stock parts are assigned a cost value when received into stock. The recommended method is via [[Creating a purchase order|Purchase Ordering]]. It is important to receive goods in at the correct cost price to ensure the value and cost of sales postings are as accurate as possible.
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You should also allocate the purchase invoice to the order as an additional check. Please refer to this article - [[How do I Allocate an Invoice to a Purchase Order?]]. If you do not have the {{PL}} module on your Platinum system you may manually allocate the invoice to the order by following this article - [[Processing a Purchase Order]].
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If an item cost is incorrect, you should amend the unit cost price on the order.  
  
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{{Note|text=You need to check costs when allocating the purchase invoice. There are two methods for carrying out this check depending on whether the link between the Purchase Ledger and Purchase Order Processing systems has been enabled. If the link is switched on please refer to this article for processing [[How do I Allocate an Invoice to a Purchase Order?]], or you can manually allocate your invoice by following this article [[Processing a Purchase Order]]. If costs are incorrect, then costs should be amended if the order is still present and security allows it.}}
 
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{{Note|text=If you have noticed retrospectively, that you have received in stock parts under the wrong cost price, you will need to unreceive - [[How do I Un-Receive an Purchase Order Item?]] and receive in under the correct cost price.}}
 
 
{{Note|text=The system will not change the cost of goods sold but will post the difference as a result of the cost change and will update stock history.}}
 
{{Note|text=The system will not change the cost of goods sold but will post the difference as a result of the cost change and will update stock history.}}
  
 
{{Example|text=
 
{{Example|text=
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Originally, 80 boxes of Item A are brought in at £3 each. Then, an additional 150 more boxes are brought in at a cost of £4 each. There are now 230 boxes of Item A in stock.
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80 boxes of Item A are brought in at £3 each. An additional 150 boxes are brought in at a cost of £4 each. There are now 230 boxes of Item A in stock.
 
Of these, 100 boxes of Item A have been sold. Your balance sheet will show, the current stock value as (130 boxes) as:
 
Of these, 100 boxes of Item A have been sold. Your balance sheet will show, the current stock value as (130 boxes) as:
  
 
Stock Value = Remaining Units x Their Value
 
Stock Value = Remaining Units x Their Value
 
Stock Inventory Value = 130 x £4 =  £520}}
 
Stock Inventory Value = 130 x £4 =  £520}}
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== Alternative Valuation Methods ==
 
== Alternative Valuation Methods ==

Revision as of 12:00, 23 December 2022

 This article or section is under development.
Be aware: Content will change as the document progresses.

Summary

First-In-First-Out, commonly known as FIFO, is a means of valuing stock. This is the default method for all Platinum systems.

More Information

FIFO is a standard accounting practice that assumes that assets are sold in the same order that they are bought.

The key things to remember about FIFO are:

  • FIFO is an accounting method in which stock purchased or acquired first are disposed of first.
  • FIFO assumes that the remaining inventory consists of items purchased last.
  • Often, in an inflationary market, lower, older costs are recognised to the cost of goods sold, which results in a higher net income than if Standard or Average costs were used.

Automatic COS

If you have enabled the Automatic Cost of Sales features, the system will account for movements of stock via journals posted in the Nominal Ledger.

Unless an alternative setting is enabled, the Platinum system uses the FIFO method and assigns the oldest cost to the cost of goods sold.

80 boxes of Item A are brought in at £3 each. An additional 150 boxes of Item A are brought in at a cost of £4 each. There are now 230 boxes of Item A in stock.

Of these, 100 boxes of Item A have been sold. Your balance sheet will show, the total cost of goods sold (100 boxes) as:

COS = (The Number of Original Units x Their Value) + (Remaining Units From the Second Purchase x Their Value)

COS = (80 x £3) + (20 x £4) = £320

Stock Value

On a FIFO basis, parts with the oldest costs are recognised first in the P&L as cost of goods sold (COS). The remaining inventory stock parts are valued by age to calculate the Stock Value.

Stock parts are assigned a cost value when received into stock. The recommended method is via Purchase Ordering. It is important to receive goods in at the correct cost price to ensure the value and cost of sales postings are as accurate as possible.

You should also allocate the purchase invoice to the order as an additional check. Please refer to this article - How do I Allocate an Invoice to a Purchase Order?. If you do not have the Purchase Ledger module on your Platinum system you may manually allocate the invoice to the order by following this article - Processing a Purchase Order.

If an item cost is incorrect, you should amend the unit cost price on the order.

The system will not change the cost of goods sold but will post the difference as a result of the cost change and will update stock history.
80 boxes of Item A are brought in at £3 each. An additional 150 boxes are brought in at a cost of £4 each. There are now 230 boxes of Item A in stock.

Of these, 100 boxes of Item A have been sold. Your balance sheet will show, the current stock value as (130 boxes) as:

Stock Value = Remaining Units x Their Value

Stock Inventory Value = 130 x £4 = £520

Alternative Valuation Methods

Average Cost

The average cost method assigns the same cost to each item. The average cost method is calculated by dividing the cost of goods in inventory by the total number of items available for sale. This results in nett income and closing stock value balancing between FIFO and last purchased.

Standard Cost

Standard costing is a system of substituting an expected cost for actual costs in the accounting records.This will need to be manually maintained, as prices often change, you'll need frequent updates for higher valued goods.

Your accounts department should be able to advise on which method you are using. Contact your Platinum dealer or our support team on 0116 230 1500 or by using our website support contact page if you are unsure.

See also


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Keywords AND Misspellings
nominal integration, cost of sales, automatic cost of sales, cos, auto cos, stock value, adjustment, month end, FIFO
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