What is stock valuation?

What stock valuation means

Stock, also called inventory, is the goods you hold to sell: finished products, goods bought for resale, raw materials and work in progress. At the year end, whatever is unsold is counted and valued. That value appears on the balance sheet as a current asset, and it directly affects your cost of goods sold and therefore your profit.

Under UK accounting standards, stock is valued at the lower of cost and net realisable value (NRV). Cost includes the purchase price and the costs of getting goods into their current condition and location, such as import duty and inbound delivery. NRV is the expected selling price less the costs to complete and sell.

Valuation methods

• FIFO (first in, first out): assumes the oldest stock is sold first, so closing stock is valued at the most recent prices.
• Weighted average cost: values all units at the average cost of stock held.
• Specific identification: used for unique, high-value items such as cars or artwork.

LIFO (last in, first out) is not allowed under UK accounting standards or for UK tax.

Example

A clothing retailer counts 400 jackets at its year end. They cost £35 each, so cost is £14,000. Most will sell at full price, but 60 are last season's style and will only sell in a sale for £30, with £3 of selling costs each.

Stock	Cost	Net realisable value	Valued at
340 current jackets	£11,900	£27,200	£11,900
60 old-season jackets	£2,100	£1,620	£1,620
Total	£14,000		£13,520

The £480 write-down is charged against this year's profit, because the loss is already known.

Why it matters for your business

Every pound of overstated stock is a pound of overstated profit, and for a company that means tax paid on profit that does not exist. Understated stock does the opposite. Because closing stock this year is opening stock next year, errors also distort the following year's results.

An accurate year-end stock count, with damaged and slow-moving lines identified, is one of the most valuable things a product business can do before its accounts are prepared. Inventory tools linked to Xero or QuickBooks make ongoing tracking much easier for ecommerce sellers.