Valuation Of Inventory

1.1. Introduction Inventory is a key factor to determine the net income for trading and manufacturing firms. Inventory is most essential asset on the balance sheet of trading & manufacturing companies. Valuation of inventory is important because inventory will affect the cost of materials sold, net profit and income on the income statement. Total assets, stockholders’ equity mentioned on the balance sheet and current assets are affected by valuation of inventory. Ccompanies can adopt several methods to comply with accounting standards for valuation of inventory. The different method gives different values to cost of goods sold and to inventory. Inventory management is required to keep company’s financial statements up to date and presenting

In case of big business houses, annual stock taking may even take a week at the end of the year in finalizing the stock in hand on continuous basis. In case of this system certain items are physically counted, while others are weighed in kilos or tones or measured in litters. For stock taking stock sheets are used. The firms evolve such a performa of stock sheet on which all the relevant information like particulars of inventory, numbers of units, price per unit, total value, etc. can be listed and added so as to get the figure of inventory. This method offers the advantage of simplicity. Also, there is no need to maintain the various records to be maintained under perpetual inventory system. However, the limitation of this method is that discrepancies and losses in inventory will never come to light as it makes no accounting for theft, losses, shrinkage and

Gross profit is determined by deducting cost of goods sold from sales. Price of goods sold is purchases plus opening stock minus closing stock. That is why, closing stock must be properly valued and brought into accounts. Over valuation of closing stock leads to inflation of the current year profits and deflation of the profits of succeeding years. Similarly, undervaluation leads to deflation of current years profit and inflation of the profit of the succeeding years.

-Determination of financial position:- Inventory is an important element in the balance sheet. It is describes as current asset in the balance sheet at the end of the year. Balance sheet does not give true and fair view with improper inventory of the business. Keeping in view this objective the auditor’s duty in relation to the verification and valuation of inventories becomes more important.

1.3. Inventory Estimation