Stock Valuation

The inventory valuation process plays an important role in determining the company’s financial position.

INVENTORY STOCK VALUATION

Inventory stock valuation is the method of calculating the theoretical values of the stock of a company. The process or method of calculating the current worth of a stock at a given time period.

Companies use inventory valuation as a method of accounting to determine the value of unsold inventory stock when preparing their financial statements. A company’s inventory stock is an asset, and in order to be listed on the balance sheet, it must have a monetary value. You can use this value to calculate your inventory turnover ratio, which will enable you to better plan your purchasing actions.

Inventory valuation involves many steps in addition to identifying the unsold items. To get a final value, you also need a rate that you can multiply by the amount. You might have paid various prices for these items over the course of the year, so you need to decide on a method to determine a standard rate.

THERE ARE THREE METHODS FOR INVENTORY VALUATION:

  • FIFO (First In, First Out), the assumption that the first items purchased are the first to leave the warehouse. In other words, whenever you make a sale, under FIFO, the items will be subtracted from the first list of products which entered your store or warehouse.
    It is one of the most common methods of inventory valuation used by businesses, as it is simple and easy to understand. During inflation, the FIFO method yields a higher value of the ending inventory, lower cost of goods sold, and a higher gross profit.
  • LIFO (Last In, First Out), the opposite assumption that the last items that enter your store are the first ones to leave.
    The only reason to use LIFO is when businesses expect the inventory cost to increase over time and lead to a price inflation. By moving high-cost inventories to cost of goods sold, the reported profit levels of businesses can be lowered.
  • WAC (Weighted Average Cost), the item’s average cost throughout the year. The average cost per unit is calculated by dividing the total cost by the total number of units purchased during the year.

WHY IS INVENTORY STOCK VALUATION IMPORTANT

  • Stock valuation is important because it can be used to identify whether a stock is overvalued, undervalued, or at market price.
  • Investing in a company that is overvalued provides a huge downside risk. Whereas, investing in a company that is undervalued can significantly reduce the risk. Therefore, stock valuation enables you to understand your risk.
  • The way a company values its inventory has a direct impact on its gross profit, cost of goods sold (COGS), and the amount of inventory still in money at the end of each period. Therefore, inventory valuation has an impact on a company's profitability and potential value.
  • Making a decision on an inventory valuation method is crucial because once a business has made a decision, it should typically bind with it. Companies must commit to one method during their first year of filing taxes, per the auditors' requirements.
  • Follow-up of the overhead costs on inventory, especially the costs of purchasing merchandise.
  • Determining the financial value of the stock in case the company is sold or acquired.
  • Calculate liquidity ratios that help in knowing how easy it is to convert inventory into cash.
  • Determine the company’s financial position. A wrong inventory calculation can affect the correctness of the company’s financial statements, such as net income and profit or loss in the current year.

HOW CAN WE HELP

  • We provide you with the best technology to manage and value your inventory.
  • We employ cutting-edge technological procedures that increase your company's productivity and flexibility in response to market challenges.
  • We offer inventory valuations for manufacturing, wholesale, and retail markets (Finished Goods, Work-In-Process and Raw Materials).
  • We provide risk analysis and exit strategies as part of our services.
  • We work with clients of all sizes, adjusting our knowledge to suit each one's particular requirements.
  • We support financial institutions and lenders in establishing the proper lending margins needed for inventory.
  • We help financial institutions and lenders set the proper lending margins needed for inventory