How does FIFO affect Stock Value?

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.

Per the previous example, the cost of the original 80 is updated to £3.50 each. The system will post an additional £40.00 to COS as the cost of the actual items sold has been corrected.

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

• Stock integration to the nominal ledger
• Processing a Purchase Order

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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