Inventory Valuation
This is an excerpt from the paper...
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), last in first out (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,
. . .
results. The following chart illustrates the effect on gross profit and cost of goods sold during a noninflationary (or low inflationary period). It should be noted that in the charts included in this analysis, the price increases (selling price) generally lag behind the cost since vendors are likely to react more slowly to price increases.
No. Units
Unit Cost
Tot Cost
Sold
Price
Revenue
Profit
Beg Stock
100
10
1000
75
20
1500
750
Quarter 1
100
10
1000
80
20
1600
800
Quarter 2
150
10
1500
110
20
2200
1100
Quarter 3
200
10
2000
150
20
3000
1500
Quarter 4
150
11
1650
200
20
4000
1935
COGS
700
7150
615
12300
6085
End Stock
85
Effect of FIFO During High Inflation
During periods of increasing or high inflation, the FIFO method results in a lower cost of goods sold than other valuation methods. This approach results in a higher gross profit figure than if a different method of stock valuation were used. For companies such as GST, which are interested in using the
. . .
Some common words found in the essay are:
Valuation Despite, Beg Stock, GST FIFO, LIFO FIFO, FIFO Inflation, Company GST, , Inflationary Environment, Proponents LIFO, WAC LIFO, stock valuation, cost sold, gross profit, perpetual inventory, inventory system, fifo method, perpetual inventory system, inflationary environment, valuation method, inventory valuation, valuation methods, stock 100 10, quarter 1 100, 75 20 1500, method stock valuation,
Approximate Word count = 2359
Approximate Pages = 9 (250 words per page)
More Essays on Inventory Valuation
|
Customer Service
to Over
32,000 Professionally Written Papers!!!
