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# Stock Valuation Policies: AVCO, LIFO, and FIFO

These methods are used to value inventory and determine the cost of goods sold (COGS). They are critical for financial reporting, taxation, and internal management.

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## 1. FIFO (First-In, First-Out)

* **Concept**:

* The first items purchased (oldest inventory) are assumed to be sold first.
* Remaining inventory consists of the most recently purchased items.
* **Use Case**:

* Common in businesses where inventory items are perishable or have an expiration date (e.g., food or pharmaceuticals).
* **Example**:

| Date | Units Purchased | Cost per Unit | Units Sold |
| ---- |
| Jan 1 | 100 | $10 | 50 |
| Jan 5 | 100 | $12 |  |

* **COGS for 50 Units Sold**: 50 × $10 = $500.
* **Remaining Inventory**: 50 units @ $10 + 100 units @ $12.

* **Advantages**:

* Matches physical flow of goods in many cases.
* Results in lower COGS and higher profits during inflation (higher tax liability).
* **Disadvantages**:

* Not ideal during inflation as it may overstate profits.

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## 2. LIFO (Last-In, First-Out)

* **Concept**:

* The last items purchased (newest inventory) are assumed to be sold first.
* Remaining inventory consists of the oldest items.
* **Use Case**:

* Common in industries with non-perishable goods and where companies aim to reduce taxable income during inflation.
* **Example**:

| Date | Units Purchased | Cost per Unit | Units Sold |
| ---- |
| Jan 1 | 100 | $10 | 50 |
| Jan 5 | 100 | $12 |  |

* **COGS for 50 Units Sold**: 50 × $12 = $600.
* **Remaining Inventory**: 100 units @ $10 + 50 units @ $12.

* **Advantages**:

* Higher COGS during inflation, leading to lower taxable income.
* Matches current costs with current revenues.
* **Disadvantages**:

* Results in lower profits during inflation.
* Not allowed under IFRS (International Financial Reporting Standards).

---

## 3. AVCO (Average Cost Method)

* **Concept**:

* The cost of inventory is averaged, and each unit sold or remaining is valued at the average cost.
* **Formula**:

Average Cost per Unit = Total Units Available/Total Cost of Inventory​

* **Use Case**:

* Suitable for industries where inventory is indistinguishable (e.g., grains, liquids, or fuel).
* **Example**:

DateUnits PurchasedCost per UnitTotal CostJan 1100$10$1,000Jan 5100$12$1,200

* **Total Units**: 200.
* **Total Cost**: $2,200.
* **Average Cost per Unit**: $2,200 ÷ 200 = $11.
* **COGS for 50 Units Sold**: 50 × $11 = $550.
* **Remaining Inventory**: 150 units @ $11.
* **Advantages**:

* Smoothens out price fluctuations.
* Simple to calculate and apply.
* **Disadvantages**:

* Less accurate in matching current costs with revenues.
* Not reflective of actual physical inventory flow.

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## Comparison

| Feature | FIFO | LIFO | AVCO |
| ---- |
| COGS During Inflation | Lower | Higher | Moderate |
| Ending Inventory Value | Higher | Lower | Moderate |
| Profitability | Higher | Lower | Moderate |
| Use in IFRS | Allowed | Not Allowed | Allowed |

Each method suits different business models and financial strategies.