ZIMSEC O-Level Principles of Accounting (4051)
Inventory Valuation and Control: notes
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Opening and Closing Inventory
- Opening inventory: stock on hand at the start of the period. It is the closing inventory from the last period.
- Closing inventory: stock left unsold at the end of the period. It is shown as a current asset on the balance sheet.
- Cost of sales: opening inventory plus purchases minus closing inventory.
- Example: $200 opening + $800 purchases - $150 closing = $850 cost of sales.
Valuing Inventory at Lower of Cost and NRV
- Cost: the amount paid to buy the stock and get it ready for sale.
- Net realisable value (NRV): the selling price minus the costs still needed to sell the stock.
- Lower of cost and NRV: stock is valued at whichever figure is smaller. This avoids overstating assets.
- Example: cost $100, selling price $90, selling costs $15. NRV is $75, so value the stock at $75.
FIFO, LIFO and Weighted Average Cost
- FIFO (first in, first out): the oldest stock is sold first, so closing inventory uses the latest prices.
- LIFO (last in, first out): the newest stock is sold first, so closing inventory uses the oldest prices.
- Weighted average cost: each unit is priced at the average cost of all stock held.
- Example: 10 units at $4 and 10 units at $6. Average is $(40 + 60) ÷ 20 = $5 per unit.
Effect of Inventory Valuation on Profit
- Higher closing inventory: lower cost of sales, so higher gross profit.
- Lower closing inventory: higher cost of sales, so lower gross profit.
- Rising prices: FIFO gives higher profit than LIFO because older, cheaper costs go to cost of sales.
Inventory Records
- Stock card: a record of each item showing receipts, issues and balance in quantity and value.
- Stock count: a physical check of goods on hand. Compare it with the stock card and investigate any shortage.
- Stock control: keeping stock levels right so the business avoids running out or holding too much.
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