Methods of Stock Valuation - Essay Example

In the Average cost method, an average cost is calculated for all units, and this average cost is assigned to all the units remaining in the ending inventory and the cost of sales for units sold. ‘To determine the average cost, divide the total number of units available for sale into the total purchase cost for the period under examination.’(James o Gill, Moria Chatton, page 46) For a company using a periodic inventory system, the method is referred to as weighted average; and where a perpetual inventory system is in use, this method is called the moving average method. As costs are averaged out before applying to ending inventory, the material costs under-inflation are not very near to market prices but a lower than that because of the effect of earlier purchases in averaging out.

LIFO means last in first out and under this method the prices at which merchandise was most recently purchased are used to determine the amounts charged to the cost of goods sold. LIFO assumes that ‘goods are all the same and interchangeable.’(Peter J Eisen, page 322) Ending inventory is valued using the prices associated with the units acquired the earliest. As a result, the cost of goods sold computed under LIFO most closely approximates the current cost. During inflation, LIFO will result in the lowest value for ending inventory and the highest amount of goods sold, and the lowest amount of gross profits and net income.

Thus it is the FIFO method of inventory valuation that issues material at the lowest cost than the current market price when compared with other methods of inventory valuation.

B)
The person requesting the goods prepares a purchase requisition. ‘Purchase requisition is a written request from an employee inside the company to the purchasing department to purchase certain items.’(Hermanson, Edward, and Maher, page 310) The requisition is approved as to price, quantity, and quality by an authorized employee and forwarded to the purchasing department.
The purchasing department prepares the purchase order, based on the information on the purchase requisition. The purchasing department then approves the purchase order and negotiates terms with vendors. The purchase order is sent to the vendor and copies are sent to receiving department and accounts payable. The purchase department will also retain a copy. ‘A copy of the purchase order can serve as a receiving report if the quantity ordered is omitted.’(Hermanson, Edward, and Maher, page 310)
The approved purchase order obtained by receiving department from the purchasing department provides the authority to accept incoming goods in the receiving department. The receiving department inspects the goods upon receipt, counts the goods, and prepares a receiving and inspection report. If the goods are not as per the specification provided in the purchase order, the necessary decision is taken to return the goods to the supplier. The goods when received as per the specification of the purchase order are sent to the department that made the requisition for the goods. A copy of receiving report is sent to the accounts payable department. Read More