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Definition

A method of valuing stock at its replacement cost. So existing stock is valued at what it would cost to replace rather than the price paid for it. This method of stock valuation is usually employed in economies with high inflation rates. It can result in a notional profit arising from holding stock. Normally companies adopt a first-in-first-out (FIFO) approach to valuing stock where the oldest stock is assumed to be the first to leave the warehouse - leaving the most recently acquired stock to be valued at stock take. Switching between methods of stock valuation can have a significant impact on the company's cost of sales and hence on its profit. Companies are required to alert investors and shareholders to the fact that they have changed their method of valuing stock in the notes to the accounts (usually the first note).

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