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Income Tax Act 2007

Timing and quantifying rules - Valuation of trading stock (including dealer’s livestock)

EB 7: Cost allocation: cost-flow method

You could also call this:

“How to choose and use a method for valuing your trading stock”

When you have trading stock and need to figure out its value, you have to use a special method. This applies when you can’t easily tell your items apart or even when you can.

You need to use one of two methods to work out the cost of your items. These methods are called ‘cost-flow methods’. The first method is called ‘first-in first-out’. This means you assume the first items you bought are the first ones you sell. The second method is called ‘weighted average’. This means you take the average cost of all your items.

You must use the same method in your financial statements as you do for your taxes. This helps keep everything consistent and fair.

Remember, these rules are important for working out the value of your stock at the end of the year, which is called your ‘closing stock’. By following these rules, you’re making sure you’re doing things the right way according to the law.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1514300.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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EB 6: Cost, or

“How to value your closing stock at cost”

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EB 8: Cost allocation: budgeted method or standard cost method, or

“How to divide costs when using estimated or standard pricing for leftover items”

Part E Timing and quantifying rules
Valuation of trading stock (including dealer’s livestock)

EB 7Cost allocation: cost-flow method

  1. This section applies when a person who determines the value of their closing stock at cost has items of trading stock that are not separately identifiable.

  2. The person must use 1 of the cost-flow methods described in subsection (5) to identify the items of trading stock included in closing stock and to determine the cost of the items.

  3. This section also applies when a person who determines the value of their closing stock at cost has items of trading stock that are separately identifiable.

  4. The person may use 1 of the cost-flow methods described in subsection (5) to determine the cost of the items of trading stock.

  5. The cost-flow methods of allocating costs are—

  6. the first-in first-out cost method; and
    1. the weighted average cost method.

      1. A person who determines the value of their closing stock at cost must use the same cost-flow method of allocating costs as they use in their financial statements for the income year.

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