Inventory valuation and cost-flow methods

Quantity and value are different records

Inventory comprises goods or materials held for sale, production or use in the relevant process. Its valuation affects both assets and the cost recognised when goods are sold or consumed. A physical count establishes quantities under a controlled procedure; valuation assigns costs and any required adjustment. Correct arithmetic cannot compensate for missing stock, duplicate counts or goods that belong to another entity. Check ownership, location, condition and the reporting date before multiplying units by prices. Goods in transit and goods held for others require the terms and facts supplied in the question.

Cost includes the relevant purchase and conversion amounts and other costs needed to bring inventory to its location and condition under the framework used. Discounts, inward transport and abnormal losses need their appropriate treatment. Selling prices are not automatically inventory cost. A product bought for₦100 and offered for₦150 does not become a₦150 cost asset merely because a price tag is attached. If an examination supplies a special pricing or stock-account convention, identify it explicitly rather than silently switching between cost and selling value.

FIFO as a cost-flow assumption

First-in, first-out, or FIFO, assigns earlier costs to earlier issues in the cost record. It does not necessarily describe which physical item a warehouse worker picked, although physical rotation may also follow that practice. Suppose 10 units are bought at ₦100 and then 10 at ₦120, before 12 units are issued. FIF Ocharges 10×100 plus to the issue. The remaining 8 units carry the later₦120 cost, giving closing inventory₦960. The total₦2,200 cost is accounted for as issue₦1,240 plus closing₦960.

A stores ledger can show receipts, issues and balances after each movement. Under a perpetual FIF Orecord, preserve each remaining cost layer. Under a periodic calculation, use the period's total quantities and relevant ending layers according to the method. When multiple issues occur between receipts, timing matters for some average methods. Do not use a late purchase to price an earlier moving-average issue unless the stated periodic method permits that treatment. Dates are part of the calculation, not decoration.

LIFO and the reporting-framework distinction

Last-in, first-out, or LIFO, assigns the most recent available costs to issues under its assumptions. In the same 20-unit example, issuing 12 would use 10 at ₦120 and 2 at ₦100, giving issue cost₦1,400 and closing inventory₦800. The official exam syllabus includes LIFO as a method to understand and calculate. That educational inclusion must be separated from current IAS 2 reporting: for ordinarily interchangeable inventories, IAS 2 uses FIFO or weighted average rather than LIFO. Learn the examination comparison without describing every syllabus method as permitted under every reporting framework.

With rising purchase prices, the simple LIF Oexample assigns a higher cost to issues and a lower closing inventory than FIFO. Holding sales and other expenses fixed, that produces lower profit for the period. When prices fall, the direction can reverse. Do not memorise that LIF Oalways produces higher cost regardless of the price pattern. Identify the sequence of actual unit costs and calculate. Tax consequences and legal permissions depend on jurisdiction and should not be invented from a cost-flow illustration.

Average-cost methods

A weighted average divides total available cost by total available units for the relevant calculation. In the equal-batch example, average cost is. An issue of 12 costs₦1,320 and the remaining 8 cost₦880. A periodic weighted average is calculated for the period, while a moving weighted average is updated after a receipt in a perpetual record. The same data can give different issue allocations if receipts and issues occur in different order. State the approach and retain sufficient decimals until the final amount.

A simple average of quoted unit prices adds the prices and divides by their number, ignoring quantities. It happens to equal the weighted average when the batches carry equal quantities, but not generally. For 10 units at ₦100 and 30 at ₦120, the weighted average is ₦115 while the simple average of the two prices is ₦110. The distinction matters in syllabus exercises. Follow the method requested, explain its limitation and do not claim an unweighted price average necessarily allocates all actual batch costs correctly when quantities differ.

Net realisable value and profit effects

Under IAS 2, the general measurement principle is the lower of cost and net realisable value for the inventories within that rule. Net realisable value is estimated selling proceeds less relevant completion and selling costs. If an item costs₦500, can sell for₦470 andrequires₦20 tofinish andsell, its net realisable value is ₦450 in this simplified example. It is carried at ₦450 rather than cost₦500, with the appropriate write-down recognised. Do not subtract every business overhead indiscriminately; use the relevant costs and framework.

Closing inventory appears as an asset and affects cost of sales. An overstatement of closing inventory understates cost of sales and overstates profit, other things equal. The next period can also be affected because its opening inventory is wrong. A method should be applied consistently as required and disclosed under the applicable framework. Choosing whichever method creates the desired profit is not a sound accounting policy. Physical condition, obsolescence and evidence of selling prices remain important even when cost layers have been calculated accurately.

Control and self-check

Inventory controls include authorised receipts and issues, secure storage, independent counts, investigation of differences and clear cut-off procedures. A stock shortage can arise from recording error, damage or theft; a count difference alone does not establish which. Perpetual records should be checked against physical evidence rather than assumed correct because software produced them. Separate units from money throughout the workings. A reconciliation should show opening units plus receipts less issues equals closing units, and the cost allocation should also be explained.

Self-check: in the FIF Oexample, why are closing units priced at ₦120? The earlier cost layer has been assigned to issues first. Self-check: why is a syllabus LIFO calculation not proof that LIFO is allowed under IAS 2? Examination coverage and reporting permission are different questions. Present the method, dates, quantities, unit costs and total values in a readable table, then check both unit and cost totals. If the question asks for interpretation, explain the price trend and its effect on profit rather than giving a number alone.

Further application

Cut-off establishes whether a transaction belongs before or after the reporting date. A late invoice does not necessarily mean the goods arrived late, and a physical location alone may not settle ownership. Use delivery terms and supporting evidence. In a stores record, show each remaining layer after an issue so that another reader can reproduce the next calculation. When rounding average costs, retain enough precision and reconcile any final rounding difference explicitly rather than hiding it in a quantity adjustment.