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A COMPARATIVE ANALYSIS OF THE IMPACT OF INVENTORY VALUATION METHODS ON FINANCIAL REPORT STATEMENT
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Delivery: Within 24 hoursABSTRACT
This research work was conducted on with special reference to the impact
inventoryvaluation methods has on financial report statements of manufacturing
companies. For a longtime now the Accounting profession has not been able to
come up with any particular technique or method to be used uniformly in valuing
inventory. This research work examined if the method used was as a result ofthe
prevailing economic circumstances. A survey research design was adopted for the
study; data collected weregotten from both the primary and secondary sources.
An infinite population of over 3000 was used and a finite population of 220. Three
hypotheses were tested at 5 percent level of significance. Tables and percentages
were employed to answer the questionnaires while the statistical regression
coefficient analysis and Z- test were used to test the hypotheses. It was found
amongst others that the prevailing economic parameter influences the decision of
choice of inventory valuation method used. The Accounting professional bodies
should try as much as possible to adopt a particular method of inventory
valuation and the weighted average method was recommended as a method that
can withstand any economic challenges.
CHAPTER ONE
1.0 INTRODUCTION
1.1BACKGROUND OF THE STUDY
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. It is essential the way assets are valued because it could be
attributable to the numerous benefits which an organization stands to gain by
keeping an accurately valued stock that meet shareholders needs, demands for
financial information and also the relevant specification of a particular
organization. However, it will be a waste of time if the record accuracy is poor.
11
Inventory in manufacturing company or concern comprises of the following
components:
§ Raw materials inventory
§ Work- in- progress (semi- finished goods) inventory
§ Finished goods inventory
These components show the relationship between production and sales, and
it enables an organization to offer better service to its customers at a reasonable
price.
However, the technique or method used in the valuation of inventories varies
and the values placed on inventories vary in time with the prevailing economic
parameters (inflation, deflation or static economy) and it can also be influenced by
the management policy of the organization. For instance, if the objective of an
enterprise is that of profit maximization, it may result to the use of a particular
method so as to disclose lower profit, thereby using excess fund at its disposal to
expand its operations. This type of organization may discard other methods of
valuing inventories in favour of the method that suit it objectives.
According to Nwoha (2006:69), no area of accounting has produced wider
difference in practice than the computation of amount at which inventories (stocks)
and work-in-progress as stated in financial account.
12
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. Considering the large sums of money tied up in inventory as earlier
stated, Horngren and Foster (2004:756) pointed out that it is pertinent to have an
“information model” as a result of the obvious fact that if stock matters (receipts,
issues and controls) are not properly handled, it would go a long way to jeopardize
the financial status (liquidity) as well as the profitability position of the firm.
Hence, this research work is a step in the right direction to address and highlight
the role of account professional towards the achievement of choosing and adopting
appropriate inventory valuation methods for each group of industry.
13
1.2STATEMENT OF THE PROBLEMS
For a long time now the accounting profession has not been able to come up
with any particular techniques to be used uniformly in valuing inventories. Various
accounting bodies strongly recommend one method or the other. As each method
used has its effect on profits and closing inventory figures. This paves way to
differing tax assessments and brings about a situation whereby some organizations
are over assessed (overtaxed) while others are under assessed. This also bedevils
the comparability of one firm‟s performance with that of another though they may
be in the same line of business when an investor is attempting to invest his capital
in a firm.
However, each body or organization purports being consistent with the use
of certain valuation methods yet some companies adopt the method which gives
them advantage over any other recommended method or method accepted by the
Board of Internal Revenue, or Federal Board of Inland Revenue for tax assessment
purposes. The method adopted by the companies enables them to pay less tax to
the government. The problem in achieving a statutory consensus compliance
method in the administration of inventory valuation by Nigerian manufacturing
industry has persisted. An appropriate forum of diverse accounting professional
bodies is required to reach a consensus on the issues of choosing and adopting
appropriate inventory valuation methods for each group of industry. Hence, this
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