Accounts & Finance Intangible Assets HL ONLY. Learning Objectives To be able to calculate stock...
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Transcript of Accounts & Finance Intangible Assets HL ONLY. Learning Objectives To be able to calculate stock...
![Page 1: Accounts & Finance Intangible Assets HL ONLY. Learning Objectives To be able to calculate stock valuations.](https://reader035.fdocuments.in/reader035/viewer/2022062421/56649f455503460f94c66a5a/html5/thumbnails/1.jpg)
Accounts & Finance
Intangible AssetsHL ONLY
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Learning Objectives
To be able to calculate stock valuations
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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
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• Stocks are constantly being bought, and processes change frequently
• Accepted methods of stock valuation
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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• It is the logical flow of many inventories, especially with products that expire or become outdated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
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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
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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
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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
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Comparing the 2 methods – An Example
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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
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• See word document – Worked examples