Stock valuation
FIFO (First In, First Out) assumes the oldest stock is sold first, so closing stock is valued at the most recent purchase prices. This matters because purchase prices change over time, and the valuation method chosen affects the reported cost of goods sold and closing stock value.
Example 1: A business bought 100 units at ₦50 each, then later bought 100 more units at ₦60 each (200 units total). It sold 120 units. Using FIFO, find the value of the closing stock.
Closing stock = units. Under FIFO, the units sold are assumed to come from the oldest stock first: all 100 units at ₦50 are used up, then 20 units from the ₦60 batch. That leaves units of the ₦60 batch remaining, so the closing stock is valued at naira.
Depreciation
Depreciation spreads a fixed asset's cost as an expense across the years it's used, matching the expense to the periods that benefit from the asset. The straight-line method charges an equal amount each year: . The reducing balance method charges a fixed percentage of the asset's remaining book value each year, so the depreciation charge is largest in the early years and shrinks over time.
Example 2: A machine costs ₦200,000, has an estimated residual value of ₦20,000, and a useful life of 6 years. Find the annual depreciation using the straight-line method.
per year.