Stock Valuation Methods in Business Bookkeeping SS 1 First Term Lesson Notes Week 4
Subject: Bookkeeping
Class: SS1
Term: First Term
Week: 4
Age: 14-16 years
Topic: Methods of Stock Valuation
Sub-topic: Different Stock Valuation Methods and Computation of Stock Valuation
Duration: 40 minutes
Behavioural Objectives
By the end of the lesson, students should be able to:
- Identify different methods of stock valuation.
- Describe each method with examples.
- Compute stock valuation using FIFO, LIFO, and Weighted Average Cost methods.
Keywords
- FIFO (First In, First Out)
- LIFO (Last In, First Out)
- Weighted Average Cost
- Specific Identification
- Inventory Valuation
Set Induction
Engage students with a scenario of a business with different inventory items purchased at varying costs. Ask them how they think the business should value its stock.
Entry Behaviour
Students have basic knowledge of stock and its purpose from the previous lesson.
Learning Resources and Materials
- Sample inventory records
- Charts showing each stock valuation method
- Calculator for computations
Building Background / Connection to Prior Knowledge
Relate to the previous topic on stock valuation, explaining that understanding specific methods is crucial for accurate valuation.
Embedded Core Skills
- Analytical Thinking
- Problem Solving
- Financial Literacy
Learning Materials
- Textbooks
- Inventory charts with sample data
- Calculators
Reference Books
Lagos State Scheme of Work, Senior Secondary Bookkeeping Textbooks
Instructional Materials
- Whiteboard and markers
- Chart illustrations of FIFO, LIFO, Weighted Average Cost methods
- Sample inventory sheets
Content
1. Different Stock Valuation Methods
Stock valuation methods vary depending on business needs and financial strategies. Major methods include:
- First In, First Out (FIFO): Assumes the first items bought are the first items sold. Useful for businesses dealing with perishable goods.
- Last In, First Out (LIFO): Assumes the last items bought are the first items sold. Commonly used in industries with fluctuating prices.
- Weighted Average Cost (WAC): Values all inventory items at an average cost. Useful for businesses where inventory items are identical.
- Specific Identification: Values each item individually based on its specific cost. Used for high-value items like electronics or vehicles.
2. Computation of Stock Valuation
Each method of stock valuation has a specific computation process. Example data:
- Purchase 1: 10 units at $5
- Purchase 2: 15 units at $6
- Purchase 3: 20 units at $7
Computing Stock Valuation for 25 Units:
- FIFO: 10 units at $5 + 15 units at $6 = $50 + $90 = $140
- LIFO: 20 units at $7 + 5 units at $6 = $140 + $30 = $170
- Weighted Average Cost: Total Cost/Total Units = $300/45 = $6.67 per unit; 25 units = $6.67 x 25 = $166.75
Evaluation: 15 Fill-in-the-Blank Questions with Options
- The FIFO method stands for ____.
- a) Final Inventory First Order
- b) First In, First Out
- c) Fast In, Fast Out
- d) Final In, Final Out
- LIFO is beneficial when prices are ____.
- a) High
- b) Changing frequently
- c) Low
- d) Stable
- The Weighted Average Cost is calculated by ____.
- a) Adding all items
- b) Averaging the cost per unit
- c) Identifying each item individually
- d) Using the latest cost
- ____ method values items based on their specific cost.
- a) FIFO
- b) LIFO
- c) Weighted Average Cost
- d) Specific Identification
- Stock valuation helps businesses in ____.
- a) Predicting the weather
- b) Financial reporting
- c) Hiring staff
- d) Holiday planning
- FIFO is commonly used in industries dealing with ____.
- a) High-value goods
- b) Perishable items
- c) Software
- d) Artifacts
- ____ is used when items are identical.
- a) FIFO
- b) LIFO
- c) Weighted Average Cost
- d) Specific Identification
- Specific Identification is ideal for ____.
- a) Grocery stores
- b) Low-cost items
- c) High-value items
- d) Identical items
- LIFO assumes that the ____ items bought are sold first.
- a) Oldest
- b) First
- c) Newest
- d) Least valuable
- Weighted Average Cost is calculated by dividing ____.
- a) Total units by total cost
- b) Total cost by total units
- c) Total price by total value
- d) Total cost by average units
- In FIFO, the cost of goods sold is based on the ____.
- a) Latest purchase
- b) First purchase
- c) Average price
- d) Highest price
- FIFO is beneficial for ____.
- a) Increasing tax liabilities
- b) Reducing inventory management costs
- c) Minimizing waste of perishable goods
- d) Managing high-value items
- LIFO can help in saving money when ____.
- a) Prices are stable
- b) Prices increase over time
- c) Prices decrease
- d) Employees are increased
- A business dealing in unique items would use ____.
- a) FIFO
- b) Weighted Average Cost
- c) LIFO
- d) Specific Identification
- The ____ method results in higher costs of goods sold when prices are rising.
- a) FIFO
- b) LIFO
- c) Specific Identification
- d) Weighted Average Cost
Class Activity Discussion: 15 FAQs with Answers
- What is the FIFO method?
- FIFO assumes the first items bought are sold first.
- How does LIFO work?
- LIFO assumes the last items bought are the first sold.
- What is the Weighted Average Cost method?
- It averages the cost of all items in inventory.
- What is Specific Identification used for?
- It values each item individually based on its specific cost.
- Why is FIFO used in grocery stores?
- It prevents spoilage by selling older items first.
- When would LIFO be beneficial?
- When prices are rising, as it reduces profit on paper, lowering tax.
- What type of business might use Specific Identification?
- Businesses selling high-value items like cars or electronics.
- How do you compute Weighted Average Cost?
- Divide total cost by total units.
- What impact does stock valuation have on financial reporting?
- It affects the balance sheet and income statement.
- Why is LIFO not suitable for perishable goods?
- It assumes the last items are sold first, which could cause spoilage.
- Does FIFO result in lower taxes in a rising price environment?
- No, LIFO does due to higher costs of goods sold.
- Can FIFO lead to overstatement of profit in inflation?
- Yes, since older, cheaper costs are used in valuation.
- What type of inventory would use the Weighted Average Cost?
- Uniform inventory like grains or raw materials.
- What is the effect of FIFO on cost of goods sold?
- It tends to show lower costs in rising price environments.
- Why is stock valuation essential in bookkeeping?
- It provides accurate inventory value for financial records.
Presentation
Step 1: Revision of Previous Topic
- Review the previous lesson on the purpose of stock valuation.
Step 2: Introduction of New Topic
- Introduce different stock valuation methods and explain their importance in inventory management.
Step 3: Student Contributions and Teacher Corrections
- Allow students to share ideas on which methods might fit different business types. Correct and elaborate as needed.
Activities
- Teacher’s Activities: Explain and demonstrate each stock valuation method. Provide a sample computation for each method.
- Learner’s Activities: Participate in discussions, compute stock valuation examples, and practice using the methods explained.
Assessment: 10 Evaluation Questions
- Define the FIFO method.
- In which business would LIFO be useful?
- Describe the Weighted Average Cost method in your own words.
- Why might a business use Specific Identification?
- Calculate the value of 20 units using the FIFO method if 10 units are bought at $5 and another 10 at $7.
- What is one advantage of LIFO in a rising price environment?
- Name one drawback of using FIFO.
- When is Weighted Average Cost commonly applied?
- How does stock valuation impact taxes?
- Provide an example of a business that would benefit from the Specific Identification method.
Conclusion
The teacher moves around, checks students’ answers, and clarifies any points of confusion.