Stock counts and valuation for traders: FIFO vs weighted average explained

Stock is usually the largest asset a trader holds and the one most often wrong. The system says you have 400 cartons; the shelf holds 372. The books value the stock at one figure; your gut says it should be lower. Two things fix this: counting regularly and valuing consistently. Neither is complicated, but both need to be done on purpose.

Part 1: how to count stock

Prepare

• Choose a cut-off: stop receipts, issues and deliveries during the count, or record exactly which movements happened after the count started
• Tidy the warehouse so each item sits in one known location and is easy to count
• Print count sheets without system quantities, so counters count rather than copy
• Assign counters in pairs, with one counting and one checking, and keep storekeepers out of final sign-off

Count and compare

1. 1Count each item and record the quantity, unit of measure and condition (good, damaged, expired).
2. 2Compare counted quantities with the system quantities at the same cut-off.
3. 3Recount every large difference with a different person before you accept it.
4. 4Investigate causes: unrecorded sales, goods received but not entered, wrong unit of measure, misplaced items, theft.
5. 5Post adjustments with a reason and an approver, and keep the signed count sheets.

In the eSolverBooks inventory module, stock counts are a separate workflow: you create a count, record the counted quantities, review variances and then post the adjustment, so the difference is a visible, approved entry rather than a quiet edit of the balance.

How often

A full count once a year is the minimum, usually at 30 June for July-June businesses. Better is a cycle count: count a section or a group of items every week or month so that everything is counted at least a couple of times a year, with fast-moving and high-value items counted more often. Small, frequent counts find problems while you can still remember what happened.

Part 2: valuation, FIFO and weighted average

Quantity tells you how much you have. Valuation tells you what it is worth on the books. Because you buy the same item at different prices over time, you need a rule for deciding which cost goes on the units you sold and which stays on the shelf. The two common rules are FIFO (first in, first out) and weighted average.

A worked example

You buy 100 units at Tk 100, then 100 units at Tk 120. You sell 150 units. What was cost of sales, and what is the stock worth?

Total cost is the same Tk 22,000 either way: Tk 16,000 plus Tk 6,000 under FIFO, Tk 16,500 plus Tk 5,500 under weighted average. The methods differ only in how it is split between cost of sales and closing stock. When prices rise, FIFO shows a higher closing stock and lower cost of sales (so higher profit); when prices fall, the reverse.

Which should you use?

• FIFO matches the physical flow for perishable, dated or fashion goods and is easy to explain. It needs cost layers by purchase
• Weighted average is simple to apply and smooths price swings. It suits commodities and fungible goods that are mixed in storage
• Choose one method per category of stock and apply it consistently. Changing the method to flatter profit is something auditors notice
• Check what your accounting framework and your auditor accept for your type of business

Part 3: lower of cost and net realisable value

Whatever method you use, stock should not sit on the books at more than you can realistically recover from selling it. Items that are damaged, obsolete, near expiry or have a market price below cost should be written down to the amount you expect to receive, less the costs of selling. Review aged stock at least at each year end: items with no movement for 6 to 12 months deserve a question.

Part 4: keep the system honest between counts

• Make sure every receipt is entered against a purchase and every issue against a sale or transfer, with the date of the physical movement
• Record landed cost, not just the supplier price, so valuation reflects real cost
• Use consistent units of measure. A carton in one record and a dozen in another is a classic source of phantom differences
• Watch for negative stock balances. They are a flag that something was entered out of order
• Review stock value against cost of sales every month for reasonableness

The most valuable habit is the simplest: reconcile counts to the system on a schedule, and treat every difference as information. If the same product is short every time, the problem is a process, not a miscount.