How does FIFO affect Stock Value?
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Contents
Summary
First-In-First-Out, commonly known as FIFO, is a means of valuing stock. This is the default method for all Platinum systems.
More Information
FIFO is a standard accounting practice that assumes that assets are sold in the same order that they are bought.
The key things to remember about FIFO are:
- FIFO is an accounting method in which stock purchased or acquired first are disposed of first.
- FIFO assumes that the remaining inventory consists of items purchased last.
- Often, in an inflationary market, lower, older costs are recognised to the cost of goods sold, which results in a higher net income than if Standard or Average costs were used.
Automatic COS
If you have enabled the Automatic Cost of Sales features, the system will account for movements of stock via journals posted in the Nominal Ledger.
Unless an alternative setting is enabled, the Platinum system uses the FIFO method and assigns the oldest cost to the cost of goods sold.
 | 80 boxes of Item A are brought in at £3 each. An additional 150 boxes of Item A are brought in at a cost of £4 each. There are now 230 boxes of Item A in stock.
Of these, 100 boxes of Item A have been sold. Your balance sheet will show, the total cost of goods sold (100 boxes) as: COS = (The Number of Original Units x Their Value) + (Remaining Units From the Second Purchase x Their Value) COS = (80 x £3) + (20 x £4) = £320 |
Stock Value
We use FIFO to value stock, as FIFO assumes that stock parts with the oldest costs are recognised first in the P&L as cost of goods sold (COS). The remaining inventory stock parts are then matched to the stock parts that are most recently purchased, and shown in Stock Value.
Stock parts are assigned a cost value, as items are received in through " Purchase Order Processing Add,Edit,Process Purch. Orders". This is why it is important that you receive goods in at the correct cost price.
 | You need to check costs when allocating the purchase invoice. There are two methods for carrying out this check depending on whether the link between the Purchase Ledger and Purchase Order Processing systems has been enabled. If the link is switched on please refer to this article for processing How do I Allocate an Invoice to a Purchase Order?, or you can manually allocate your invoice by following this article Processing a Purchase Order. If costs are incorrect, then costs should be amended if the order is still present and security allows it. |
| If you have noticed retrospectively, that you have received in stock parts under the wrong cost price, you will need to unreceive - How do I Un-Receive an Purchase Order Item? and receive in under the correct cost price. |
| The system will not change the cost of goods sold but will post the difference as a result of the cost change and will update stock history. |
| Originally, 80 boxes of Item A are brought in at £3 each. Then, an additional 150 more boxes are brought in at a cost of £4 each. There are now 230 boxes of Item A in stock.
Of these, 100 boxes of Item A have been sold. Your balance sheet will show, the current stock value as (130 boxes) as: Stock Value = Remaining Units x Their Value Stock Inventory Value = 130 x £4 = £520 |
Alternative Valuation Methods
Average Cost
The average cost method assigns the same cost to each item. The average cost method is calculated by dividing the cost of goods in inventory by the total number of items available for sale. This results in nett income and closing stock value balancing between FIFO and last purchased.
Standard Cost
Standard costing is a system of substituting an expected cost for actual costs in the accounting records.This will need to be manually maintained, as prices often change, you'll need frequent updates for higher valued goods.
| Your accounts department should be able to advise on which method you are using. Contact your Platinum dealer or our support team on 0116 230 1500 or by using our website support contact page if you are unsure. |
See also
