# 3 Understanding Valuation Calculations

This chapter contains the following topics:

## 3.1 FIFO and LIFO Calculations

The JD Edwards EnterpriseOne Advanced Stock Valuation system uses FIFO and LIFO calculations to determine stock valuations. The value of the inventory is based on the activity that occurred on a year-to-date basis instead of a rolling inventory balance that is carried forward. To facilitate this type of processing, when the system applies the calculation method for each period, it reverses the entries for the prior period, which makes the new entries the current year-to-date values. This reversal occurs for all periods except for the last period of the year.

The reversals for every period also keep the opening inventory constant until the end of the year. Thus, because the previous period's entries are reversed, the opening inventory is always the same, regardless of what transpired in the previous period.

The system stores the total purchase quantity, amount, and average price for each period of the year. The stored information enables the system to allocate the closing inventory, starting with the current period and allocating to previous periods.

You might not always know the price of an item when you receive it. Because a quantity without a price can cause a large fluctuation in the average price, you can enter and use an override price for each period.

The information that follows includes examples of FIFO and LIFO calculations.

### 3.1.1 FIFO Calculations

The FIFO costing method assumes that the first inventory items purchased are the first ones sold. This method results in an ending inventory balance based on the costs associated with the most recent purchases. The allocated ending inventory and value become the opening inventory for the next period.

Suppose that you apply the FIFO costing method to four receipts that include five items each. This table lists the price that you paid for each receipt:

Receipt Number Amount
Receipt 1 1.00 USD
Receipt 2 1.50 USD
Receipt 3 2.00 USD
Receipt 4 2.50 USD

The total value of the inventory is 35.00 USD, which you calculate using this equation:

(1 × 5) + (1.5 × 5) + (2 × 5) + (2.5 × 5) = 35.00

Suppose that you are using the FIFO costing method and you sell five items for 1.00 USD each. In this case, the total value of the inventory is 30.00 USD, which you calculate using this equation:

(1.5 × 5) + (2 × 5) + (2.5 × 5) = 30.00

Next, suppose that you sell another five items for 1.50 USD each. In this case, the total value of the inventory is 22.50 USD, which you calculate using this equation:

(2 × 5) + (2.5 × 5) = 22.50

### 3.1.2 LIFO Calculations

The LIFO costing method assumes that the last inventory items purchased are the first ones sold. This costing method determines the stock value and cost of goods sold based on the sale of the newest stock first. That is, the inventory that has been in stock the shortest amount of time is sold first. This method results in an ending inventory balance based on the costs associated with the oldest inventory. This method also requires that the system record historical costs for all years with stock remaining for that year.

Because the purpose of the LIFO method is to reflect the inventory value accumulation or depletion at the end of the year, you must adjust the entries that you log at the end of each period to remove the effect of any accumulation or depletion. This adjustment is called a LIFO adjustment. You must do a LIFO adjustment for all periods except the last period of the year. The system records the LIFO adjustment against the income statement and balance sheet accounts.

Suppose that you apply the LIFO costing method to four receipts that include five items each. This table lists the price that you paid for each receipt:

Receipt Number Amount
Receipt 1 1.00 USD
Receipt 2 1.50 USD
Receipt 3 2.00 USD
Receipt 4 2.50 USD

The total value of the inventory is 35.00 USD, which you calculate using this equation:

(1 × 5) + (1.5 x 5) + (2 x 5) + (2.5 x 5) = 35.00

Suppose that you are using the LIFO costing method and you sell five items for 2.50 USD each. In this case, the total value of the inventory is 22.50 USD, which you calculate using this equation:

(1 × 5) + (1.5 x 5) + (2 x 5) = 22.50

Next, suppose that you sell another five items for 2.00 USD each. In this case, the total value of the inventory is 12.50 USD, which you calculate using this equation:

(1 × 5) + (1.5 x 5) = 12.50

The JD Edwards EnterpriseOne Advanced Stock Valuation system lets you calculate LIFO on a periodic or annual basis. Period LIFO considers stock increments and decrements individually by period; annual LIFO considers overall increments and decrements that occurred over the course of the year.

You specify in the Stock Valuation Constants whether to run the valuation process in annual or period mode. Because you specify the valuation process by company in the constants, if you specify the annual LIFO method for a company, you must run all methods for the company (such as FIFO or Weighted Average) in annual mode.

This table describes the annual LIFO stock valuation methods:

Time Period Stock Valuation Used
First year Stock is evaluated using the average total unit cost method for all purchases completed in the period considered.
Subsequent years One of these methods applies:
• If the number of units of stock has increased from the ending number of units for the previous year, the additional stock is a new layer and is added to the previous layers.

The value of this layer is determined by calculating the weighted average between the purchase prices for the stock over the period considered.

• If the number of units of stock has decreased from the ending number of units for the previous year, the decrement is deducted from the layers added in previous years, beginning with the most recent year.

Processing LIFO calculations in annual mode can significantly affect performance since every execution selects all transactions belonging to the processed year. Depending on the number of transactions in the F4111 table and, consequently, the number of transactions in the F39120W table, the batch process that calculates LIFO values requires time to reselect all current year inventory transactions and recalculate the average unit cost.

You must install the systems to use the LIFO stock valuation method.

### 3.1.3 Example: Annual LIFO Method of Stock Valuation

When using a LIFO method of stock rotation, you ship the most recently received stock before shipping stock received at an earlier time. This method might result in having stock in inventory that was purchased in previous years. This table lists the remaining stock for two previous years plus the purchase and sales transactions for the current year (2010):

Transaction Year Quantity Average Cost Value
Stock (layer) 2008 100 10 1000
Stock (layer) 2009 200 12 2400
Purchases 2010 300 15 4500
Sales 2010 (250) - -

During 2010, stock increased by 50 units (300 units purchased minus 250 units sold). This increase forms a new layer valued at the average cost for purchases during 2010 (15). This table displays the total value of all stock on December 31, 2010:

Transaction Year Quantity Average Cost Value
Stock (layer) 2008 100 10 1000
Stock (layer) 2009 200 12 2400
Stock (layer) 2010 50 15 750
LIFO stock value on December 31, 2010 - 350 - 4150

If in 2011 the stock decreased by 100 units, the total stock available on December 31, 2011 was 250 units. Fifty of the 100 unit decrease is deducted from the 50 units in the 2009 layer, and 50 units are deducted from the 2008 layer. This table lists the stock and value on December 31, 2010:

Transaction Year Quantity Average Cost Value
Stock (layer) 2008 100 10 1000
Stock (layer) 2009 150 12 1800
LIFO stock value on December 31, 2011 - 250 - 2800

## 3.2 Weighted Average Cost Calculations

The weighted average cost method calculates the inventory value based on a cost that is a weighted average of the purchases for a given period.

This section discusses:

• Average cost in Inventory Management.

• Average cost in Advanced Stock Valuation.

### 3.2.1 Average Cost in Inventory Management

In JD Edwards EnterpriseOne Inventory Management, sales order costs depend on the current average cost, not the period average cost. The timing of a purchase also significantly affects the cost of the inventory. This table lists information for two receipts:

Receipt Date Quantity Price Per Item Total Price
January 1, 2010 100 1.00 USD 100.00 USD
January 15, 2010 100 2.00 USD 200.00 USD

You calculate the effect of the purchase price on the cost of inventory for this example as follows:

The average cost per item is 1.50 USD, which you calculate using this equation:

(100 + 200)/200 = 1.50 USD

On January 15, 2010, you sell 50 items for 1.50 each, for a total sales price of 75.00 USD. The average cost per piece is 1.50 USD, which you calculate using this equation:

225/150 = 1.50

If you had made the sale before you received the second receipt, then the cost that appears on the sales order would have been different, and the entire value of the stock would also have been different.

### 3.2.2 Average Cost in Advanced Stock Valuation

When you use the average cost method in JD Edwards EnterpriseOne Advanced Stock Valuation, timing is not an issue. The system first calculates the average cost for all incoming receipts, without considering when the outgoing transaction occurred. Incoming transactions are the true value of the stock; they indicate what you paid for the items.

To calculate the true cost of goods sold, the system calculates all incoming transactions and bases the outgoing values on that amount.