Impact Of Inventory Valuation Methods On Financial Report Statements

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Impact Of Inventory Valuation Methods On Financial Report Statements

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PROJECT TOPIC AND MATERIAL ON IMPACT OF INVENTORY VALUATION METHODS ON FINANCIAL REPORT STATEMENTS

The Project File Details

  • Name: Impact Of Inventory Valuation Methods On Financial Report Statements
  • Type: PDF and MS Word (DOC)
  • Size: [70 KB]
  • Length: [56] Pages

 

 

 

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Inventory refers to the stock of the resources which are held to sales and/or future production. It can be also viewed as an idle resource which has an economic value. So, better management of the inventories would release capital productively. Inventory control implies the coordination of materials controlling, utilization and purchasing. It has also the purpose of getting the right inventory at the right place in the right time with right quantity because it is directly connected with the production. This implies that the profitability of the firm is directly or indirectly affected by the inventory management.

Inventory valuation method used by an enterprise is determined by a number of reasons. These include inflation, differences in quantity discounts, frequent changes in prices of commodity, buying from different suppliers and also the nature of items or product. For instance a company that deals on perishable goods, let’s say a grocery store, prefers an inventory valuation method that recognizes the out flow of goods that were first in stock.

This arises as a result of the perish ability of the items treated and the high turnover rate could also be accounted for this choice of method FIFO (first-in, first-out). The level of the three component of the inventory stated earlier differs among organizations depending on the nature and volume of operation undertaken. Manufacturing companies have a high level of raw material inventory and semi-finished goods inventory as it is found in the grocery stores.

Inventory valuation allows companies to provide a monetary value for items that make up their inventory (stock). Inventories are usually the largest current asset of a business and are as important as funds (cash). It is a form of fund tied up in assets (current assets). It’s proper or accurate measurement or valuation cannot be overlooked as it forms a greater percentage of an enterprise’s current assets in particular and a total asset in general. For manufacturing companies, inventories usually represent approximately 20 to 60 percent (%) of their assets. If inventory is not properly valued, it may result that expenses and revenue may as well not be properly matched and a company could make poor business decisions that will affect the company’s profit.

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