Many ask about the way in which they can evaluate the value or price of the remaining goods in the stores of their companies or institutions, and on what basis is this evaluation based?
The prevailing in this matter was the evaluation of the price of the remaining goods in the stores based on the cost price of purchasing them. However, this evaluation created problems in the event that the selling price of any of the items stored in the market was less than its cost price. This is what created the need for the valuation to be based on the market price. In order for the financial statements to be realistically and properly expressed.
Hence the accounting standards for evaluating goods on the basis of the cost or market price, whichever is lower, but after that this criterion changed so that the new evaluation is based on the cost price or the net realizable value, whichever is lower.
The value of the net collectible value can be determined by the following equation:
Net realization value (net market value) = selling price - selling expenses
In this new article on the "Idea Programa Education" blog, we will explain to you common inventory pricing methods and how you can determine the value of the remaining goods in your stores.
What are the inventory pricing methods?
During one financial period, it is possible for your facility to purchase a class of goods at more than one price; According to the continuous changes in the market and what is reflected in the prices of products and goods along the financial period.
During one financial period, it is possible for your facility to purchase a class of goods at more than one price; According to the continuous changes in the market and what is reflected in the prices of products and goods along the financial period.
In this case, it will require your establishment to choose the appropriate price for the goods remaining in the warehouses to adjust the financial books. There are several methods used in determining the cost or pricing of inventory at the end of each fiscal period, as follows:
The method of specific pricing or distinguishing the goods
average cost method
First in first out method
Last in first out method
These are the common methods of inventory pricing in any of the different companies, businesses or commercial establishments. Now, we explain each method in detail with examples…
average cost method
First in first out method
Last in first out method
These are the common methods of inventory pricing in any of the different companies, businesses or commercial establishments. Now, we explain each method in detail with examples…
The method of specific pricing or distinguishing the goods
The method of specific pricing method or distinguishing the goods is based on pricing each item or unit of the company’s goods remaining in the warehouses at the end of the period based on the cost price of purchasing this unit.
The method of specific pricing method or distinguishing the goods is based on pricing each item or unit of the company’s goods remaining in the warehouses at the end of the period based on the cost price of purchasing this unit.
💡 Practical example:
If a company engaged in trading electrical appliances purchased two refrigerators of the same type at two different prices, and during the fiscal year one was sold and one remained until the end of the period. According to the specified pricing method, the remaining refrigerator is priced at its purchase price recorded in the books.
However, this method works well with companies that can distinguish or determine the cost of each unit of the goods that they have, and that have small quantities and items of goods that have a high cost at the same time, such as car showrooms and stores that sell air conditioners and electrical appliances, as in the previous example.
average cost method
According to the average cost method, the remaining goods in the stores are evaluated at the end of the period after determining the value of the average purchase prices (weighted average cost).
According to the average cost method, the remaining goods in the stores are evaluated at the end of the period after determining the value of the average purchase prices (weighted average cost).
This can be done by dividing the total cost of goods available for sale by the quantity of goods available for sale, after which the weighted average price is multiplied by the remaining quantity in stores; In order to know the cost of inventory at the end of the period, as shown in the following equations:
Weighted average price = total cost of goods available for sale / quantity of goods available for sale
Inventory cost = weighted average price * quantity of unsold inventory (ending inventory)
💡 Practical example:
The statement shown below is a special statement for a class of goods remaining in the warehouses of Al-Salam Trading Company for the fiscal year 2015:
At the time of inventory, the number of remaining units at the end of the period of this type was only 70 units.
Required:
What is required here is to calculate the cost of the remaining goods in the warehouses of the Salam Company at the end of the period using the weighted average method that we have explained.
the solution:
First: The cost of goods available for sale during the period is extracted, based on the following equation:
Cost of goods available = cost of goods available at the beginning of the period + cost of goods purchased during the period
(60*10)+(100*8)+(20*15)+(30*11)=2030$
Second: The weighted average price is extracted as follows:
Weighted average price = Cost of goods available for sale / Number of units available for sale
210/2030 = $9.65
Third: The cost of the remaining goods (the end of the period) is extracted, as in the following equation:
Remaining cost of goods (end of period) = weighted average price * remaining quantity
9.65*70=675.5$
First in first out method
The first-in, first-out method is based on the assumption that the goods received in the warehouses of the establishment first go out first, and therefore the remaining goods in the stores (last period) are assumed to be from the last goods purchased, and accordingly the goods of the last period are assigned based on the last purchase prices Done.
The first-in, first-out method is based on the assumption that the goods received in the warehouses of the establishment first go out first, and therefore the remaining goods in the stores (last period) are assumed to be from the last goods purchased, and accordingly the goods of the last period are assigned based on the last purchase prices Done.
Example
With the same data as the previous example, if it is required to calculate the cost of goods at the end of the period according to the first-in-first-out method.
With the same data as the previous example, if it is required to calculate the cost of goods at the end of the period according to the first-in-first-out method.
the solution:
The cost of the remaining goods at the end of the period (70 units) is determined according to the latest prices, as follows:
The cost of the remaining goods at the end of the period (70 units) is determined according to the latest prices, as follows:
(30 * 11) + (20 * 15) + (20 * 8) = 790 $
💡 Practical example:
With the same data as the previous example, if it is required to calculate the cost of goods at the end of the period according to the first-in-first-out method, then what is the solution?
the solution:
The cost of the remaining goods at the end of the period (70 units) is determined according to the latest prices, as in the following equation:
(30 * 11) + (20 * 15) + (20 * 8) = 790 $
Last in first out method
Unlike the previous accounting method, the last-in-first-out method assumes that the last-in goods are sold first. This means that the cost of the goods remaining in stock at the end of the period is determined based on the first purchase prices.
Unlike the previous accounting method, the last-in-first-out method assumes that the last-in goods are sold first. This means that the cost of the goods remaining in stock at the end of the period is determined based on the first purchase prices.
However, for information, the use of the last-in-first-out method has been canceled in practice, according to international inventory accounting standards.
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