B2.612 Valuation of stock—cost price
The process of ascertaining cost is primarily a matter of identification. In some cases physical identification is possible. This is the position where articles are sold in the same condition as that in which they are bought, where each article is identifiable and distinguishable from the rest and where records can be kept showing the actual cost of each article bought (eg a dealer in land or buildings). See below as regards dealers in motor cars.
It is necessary to remember that 'cost' is not synonymous with price. Other items of expenditure, such as freight or warehouse charges, or insurance, may need to be added to the price in some cases1. HMRC interprets2 cost as meaning the total historical cost of bringing the relevant stock to its existing condition and location. If it cannot be ascertained precisely, then the closest approximation should be made.
In some cases, no physical identification is possible. This applies particularly where sales are made from a stock which is replenished by purchases at intervals and at varying prices, each separate purchase losing its identity when it becomes part of the total stock of that particular commodity (eg a petrol filling station). In such cases it is necessary to base the valuation on some assumption, the one most commonly used being that goods bought first are sold first (the first in, first out or FIFO method). The cost of the unsold stock at any time will then be the cost of the latest