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Inventory Valuation

For companies which operate outside of the service industry, stock (or inventory) valuation is a critical component of their accounting procedure. For most companies, stock on-hand represents a considerable portion of their current assets, and most companies are taxed based on their stock valuation. The lower the stock valuation, the higher the company's profitability; this can serve as a motive for managers to find the lowest valuation method when their bonuses are based on profitability. Despite the importance of stock valuation, there is no single method which has emerged as the accepted standard. Indeed, there are three methods which are commonly used in different environments: first-in-first-out (FIFO), lastinfirstout (LIFO), and weighted average cost (WAC). Each of these methods are generally accepted in the business world (although the LIFO method is not approved for accounting statement valuation in the United Kingdom), and each has peculiarities which render them more (or less) effective to particular business and economic environments. This research examines the various methods for stock valuation and considers the valuation method in place at a building materials company.

Gulf Sail General Trading Company (GST) is a general trading, limited liability, company. The primary business is the wholesale and retail sale of building materials, and the company is divided into three divisions: air conditioning equipment, spare parts and sanitary ware. Service is handled as a part of the air conditioning equipment division. Each of the divisions is operated independently, and although the company trades in technology items, such items are not subject to rapid change.

GST offers bonuses to division managers based on profitability within their divisions. GST has also mandated that the company use the FIFO method of inventory valuation, meaning that stock valuation is based on the assumption that stock received into ...

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Inventory Valuation. (1969, December 31). In Retrieved 07:48, February 28, 2017, from