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Accounts & Finance

Accounts & Finance. Intangible Assets HL ONLY. Learning Objectives. To be able to calculate stock valuations. Stock Valuation. Value of closing stock on a balance sheet is a major factor influencing: The value of a company’s balance sheet

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Accounts & Finance

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  1. Accounts & Finance Intangible Assets HL ONLY

  2. Learning Objectives • To be able to calculate stock valuations

  3. Stock Valuation • Value of closing stock on a balance sheet is a major factor influencing: • The value of a company’s balance sheet • Profit recorded – higher the value given to closing stock, lower the cost of goods sold Valuation of stocks can vary greatly depending on the method used and the rate of inflation

  4. Stocks are constantly being bought, and processes change frequently • Accepted methods of stock valuation

  5. First in first outFIFO • The goods first added to inventory (stock) are assumed to be the first goods removed from inventory for sale • It is the logical flow of many inventories, especially with products that expire or become outdated • Ensures that any unsold stock is more realistically valued at its current or replacement cost

  6. Last in first out (LIFO) • Goods last added to inventory are assumed to be the first goods removed from inventory for sale • Valuing stocks by using the most recent batches of stocks first since there is no “sell by” date • Coal, copper • Older stock is usually valued at a lower cost • This method is not permitted in many countries because of the tax benefits

  7. Last in first out (LIFO) • Tax benefits • Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation. This generally results in lower taxation

  8. LIFO • Cost of goods sold COGS = opening stock + purchases – closing stock AND Gross profit = sales revenue - COGS So when declaring Gross Profit, it would seem lower when using LIFO, therefore not having to pay as much tax

  9. Comparing the 2 methods – An Example

  10. Choosing between the two • If there were no increases of prices over time (inflation) it wouldn’t matter which method was chosen • But inflation makes the choice of stock valuation methods important as it can affect the level of reported profits and therefore the amount of tax a company has to pay • Some laws prevent switching between the two • Some laws prevent businesses from using LIFO because of tax benefits • At the moment LIFO is only used in Japan and the USA

  11. See word document – Worked examples

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