8.14

(a) SSAP 9, Stocks and Long-Term Contracts, requires stocks of raw materials and finished goods to be valued in financial statements at the lower of cost and net realizable value.

(i) Appendix 1 to SSAP 9 states that in arriving at the cost of stock, methods such as last in first out (LIFO) are not usually appropriate. Explain how LIFO is applied.

(2 marks)

(ii) Describe three methods of arriving at cost of stock which are acceptable under SSAP 9 and explain why they are regarded as acceptable, and LIFO is not.

(5 marks)

(iii) Explain how the cost of a stock of finished goods held by the manufacturer would normally be arrived at when obtaining the figure for the financial statements.

(3 marks)

(b) Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first in, first out) in valuing stock, but it is interested to know the effect on its stock valuation of using LIFO (last in, first out) and weighted average cost instead of FIFO.

At 28 February 19X8 the company had a stock of 4,000 standard plastic tables and has computed its value on each of the three bases as:

Basis Unit cost Total value £ £
FIFO 16 64,000 LIFO 12 48,000 Weighted average 13 52,000 During March 19X8 the movements on the stock of tables were as follows:
Received from factory:
Production cost Date Number of units per unit £
8 March 3,800 15 22 March 6,000 18 Sales:
Date Number of units 12 March 5,000 18 March 2,000 24 March 3,000 28 March 2,000 On a FIFO basis the stock at 31 March 19X8 was £32,400.
Compute what the value of the stock at 31 March 19X8 would be using:
(i) LIFO; (5 marks)
(ii) weighted average cost. (5 marks)
In arriving at the total stock values you should make calculations of two decimal places (where necessary) and deal with each stock movement in date order.