Stock Evalaution SS2 Book Keeping Lesson Note

MEANING OF VALUATION

Valuation refers to the process of determining the monetary worth or value of an asset, investment, business, or financial instrument. It involves assessing the intrinsic or market value of the asset based on various factors such as its physical attributes, financial performance, future earning potential, and market conditions. Valuation is essential for making informed decisions regarding investment, financing, mergers and acquisitions, financial reporting, taxation, and other business activities.

VALUATION OF STOCK

The valuation of stock, also known as inventory valuation, is the process of determining the value of the goods or products held by a business for resale. It is crucial to accurately report the cost of goods sold (COGS) and the value of inventory on the balance sheet. 

Stock valuation methods include FIFO (First-In-First-Out), LIFO (Last-In-First-Out), weighted average cost, and specific identification.

REASONS FOR EVALUATION OF STOCKS

1. Financial Reporting: Accurate stock valuation is necessary for preparing financial statements, including the income statement and balance sheet.

2. Taxation: Stock valuation affects the calculation of taxable income and tax liabilities, particularly for determining the cost of goods sold.

3. Decision Making: Business decisions regarding pricing, purchasing, production, and inventory management rely on accurate stock valuation.

4. Performance Evaluation: Stock valuation provides insights into the profitability and efficiency of inventory management practices.

5. Investor Relations: Investors and stakeholders use stock valuation information to assess the financial health and performance of a business.

METHODS OF VALUATION OF STOCK

1. FIFO (First-In-First-Out): This method assumes that the oldest inventory items are sold first, and the cost of goods sold is based on the cost of the oldest purchases.

To calculate FIFO (First-In, First Out) determine the cost of your oldest inventory and multiply that cost by the amount of inventory sold.

2. LIFO (Last-In-First-Out): LIFO assumes that the newest inventory items are sold first, and the cost of goods sold is based on the cost of the most recent purchases.

To calculate LIFO (Last-in, First-Out) determine the cost of your most recent inventory and multiply it by the amount of inventory sold.

3. Weighted Average Cost: This method calculates the average cost of inventory by dividing the total cost of goods available for sale by the total number of units available for sale.

4. Specific Identification: Under this method, each inventory item is individually identified and tracked, and the cost of goods sold and ending inventory is determined based on the specific costs assigned to each item.