A COMPARATIVE ANALYSIS OF THE IMPACT OF INVENTORY VALUATION METHODS ON FINANCIAL REPORT STATEMENT IN SOME MANUFACTURING COMPANIES.
ABSTRACT
This study was conducted with a focus on the impact inventory valuation methods have on financial report statements of manufacturing companies. For a long time, the accounting profession has been unable to develop a standardized technique or method for valuing inventory.
This study investigated whether the method used was influenced by the current economic situation. The study used a survey research design, with data gathered from both primary and secondary sources. An infinite population of over 3000 and a finite population of 220 were used. At a 5% level of significance, three hypotheses were tested.
To answer the questionnaires, tables and percentages were used, while statistical regression coefficient analysis and the Z- test were used to test the hypotheses. It was discovered, among other things, that the prevailing economic parameter influences the choice of inventory valuation method used.
Accounting professional bodies should try to adopt a specific method of inventory valuation as much as possible, and the weighted average method was recommended as a method that can withstand any economic challenges.
TABLE OF MATERIALS
PAGE TITLE
I
PAGE OF APPROVAL
………………………………………………………..ii
DEDICATION…………………………………………………..…………iii
ACKNOWLEDGMENTS…………………………………………….……iv
ABSTRACT…………………………………………………………………v
TABLE OF CONTENTS…………………………………………………..vi
INTRODUCTION TO CHAPTER ONE
1.1 STUDY BACKGROUND………………………………………1
1.2STATEMENT OF THE PROBLEM……………………………….4
1.3STUDY OBJECTIVES
…………………………………………..5
1.4 QUESTIONS FOR RESEARCH
………………………………………….5
HYPOTHESES 1.5
………………………………………………………6
1.6 THE STUDY’S SIGNIFICANCE………………………………..7
1.7 STUDY SCOPE…………………………………………….8
1.8 THE STUDY’S LIMITATIONS
……………………………………………..9
1.9 DEFINITION OF TERMS…………………………………………10
LITERATURE REVIEW IN CHAPTER TWO
2.1 HISTORICAL PERSPECTIVE
………………………………..………..13
2.2 THE PROBLEM OF INVENTORY MANAGEMENT…………….14
2.3 INVENTORY VALUATION……………………………………….16
2.4 INVENTORY VALUATION METHODS……………………….20
REFERENCE……………………………………………………………………..37
RESEARCH METHODOLOGY (CHAPTER THREE)
3.1 INTRODUCTION……………………………………………………..39
3.3 STUDY AREA……………………………………………..40
3.4 STUDY POULATION………………………………………41
3.5 SAMPLE SIZE AND SAMPLING TECHNIQUES………………….
41
3.6 DATA COLLECTION INSTRUMENT………………………..44
3.7 INSTRUMENT VALIDITY………………………………..45
3.8 INSTRUMENT RELIABILITY…………………………………..45
3.9 DATA COLLECTION METHOD………………………………..46
3.10 DATA ANALYSIS METHOD………………………………….46
CHAPTERS FOUR AND FIVE: DATA PRESENTATION, ANALYSIS, AND INTERPRETATION
4.1 ANALYSIS OF DATA
………………………………..……………………..49
4.2 HYPOTHESES TESTING ……………………….…………………66
SUMMARY OF FINDINGS, RECOMMENDATIONS, AND CONCLUSION
5.1 SUMMARY OF FINDINGS………………………………………………………….82
RECOMMENDATIONS 5.2
……………………………………………….84
5.3 FINAL REMARKS
…………………………………………………………..86 BIBLIOGRAPHY ………………………………………………………88
A APPENDIX
……………………………………………………………90
B APPENDIX
…………………………………………………………….9
CHAPTER ONE
1.0INTRODUCTION
1.1 THE STUDY’S BACKGROUND
Inventory valuation enables businesses to assign a monetary value to the items that comprise their inventory (stock).
Inventories are a company’s most valuable current asset, second only to cash (cash). It is a type of asset-backed fund (current assets). Its proper or accurate measurement or valuation cannot be overlooked because it accounts for a larger proportion of an enterprise’s current assets in particular and total assets in general.
Inventories typically account for 20 to 60 percent (percent) of a manufacturing company’s assets. If inventory is not properly valued, expenses and revenue may not be properly matched, and a company may make poor business decisions that negatively impact the company’s profit.
It is critical how assets are valued because it may be related to the numerous benefits that an organization stands to gain by maintaining an accurately valued stock that meets shareholders’ needs, demands for financial information, and also the relevant specifications of a specific organization. However, if the record accuracy is poor, it will be a waste of time.
Inventory in a manufacturing company or concern is made up of the following parts:
Inventory of raw materials
Inventory of work-in-process (semi-finished goods)
Inventory of finished goods
These components demonstrate the relationship between production and sales, allowing a company to provide better service to its customers at a lower cost.
However, the technique or method used in inventory valuation varies, and the values placed on inventories change over time with the prevailing economic parameters (inflation, deflation, or static economy), and it can also be influenced by the organization’s management policy.
For example, if an enterprise’s goal is to maximize profits, it may employ a specific method to reveal lower profits, allowing it to use the excess funds at its disposal to expand its operations. This type of organization may reject other methods of inventory valuation in favor of the method that best meets its objectives.
According to Nwoha (2006:69), no area of accounting has resulted in a greater disparity in practice than the computation of the amount at which inventories (stocks) and work-in-progress are reported in financial accounts.
A company’s inventory valuation method is determined by a variety of factors. These include inflation, differences in quantity discounts, frequent changes in commodity prices, purchasing from various suppliers, and the nature of the items or product.
For example, a company that sells perishable goods, such as a grocery store, prefers an inventory valuation method that accounts for the outflow of goods that were initially in stock. This is due to the perishability of the items treated, and the high turnover rate could also account for this FIFO method selection (first-in, first-out). The level of the three components of the inventory mentioned earlier varies depending on the nature and volume of operations undertaken.
Manufacturing firms, like grocery stores, have a high level of raw material inventory and semi-finished goods inventory. Given the large sums of money tied up in inventory, Horngren and Foster (2004:756) pointed out that it is important to have an inventory management system.
“information model” as a result of the obvious fact that if stock matters (receipts, issues, and controls) are not handled properly, it will jeopardize the firm’s financial status (liquidity) as well as profitability position. As a result, this research work is a step in the right direction in addressing and emphasizing the role of account professionals in selecting and implementing appropriate inventory valuation methods for each industry group.
1.2 OUTLINE OF THE PROBLEMS
For a long time, the accounting profession has been unable to develop any specific techniques for uniformly valuing inventories. Various accounting bodies strongly advise either method. Because each method has an impact on profits and closing inventory figures.
This results in disparities in tax assessments, with some organizations being over assessed (overtaxed) while others being underassessed. When an investor is attempting to invest his capital in a firm, this also complicates the comparability of one firm’s performance with that of another, even if they are in the same line of business.
However, while each body or organization claims to be consistent in its use of certain valuation methods, some businesses adopt the method that gives them an 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 companies’ method allows them to pay less tax to the government.
The Nigerian manufacturing industry’s inability to achieve a statutory consensus compliance method in the administration of inventory valuation has persisted. To reach a consensus on the issues of selecting and implementing appropriate inventory valuation methods for each industry group, an appropriate forum of diverse accounting professional bodies is required.
As a result, this research work is a step in the right direction in addressing the role of accounting professionals in achieving the goal.
1.3 THE STUDY’S OBJECTIVES
The following are the objectives of this research project:
1. Determine whether inventory valuation methods have any effect on a Nigerian manufacturing company’s assessable income tax.
2. Determine whether the current economic parameters influence the inventory valuation method used by a Nigerian manufacturing firm.
3. Determine whether variations in inventory valuation methods have an impact on the financial reporting positions of a Nigerian manufacturing company.
4. To provide an acceptable basis for valuing on-hand inventory.
5. To assess certain inventory-related constraints that accountants face.
valuation.
6. Making recommendations based on findings
1.4 QUESTIONS FOR RESEARCH
For the purposes of this study, the following questions have been formulated:
1. Does an inventory valuation method affect a Nigerian manufacturing company’s assessable income tax?
2. What effect does the current economic parameter have on the inventory valuation method used by a Nigerian manufacturing firm?
3. To what extent does the variation in inventory valuation method affect Nigerian manufacturing companies’ financial reporting positions?
1.5 HIPPOTHESES
To help achieve the study’s goal, the following hypotheses are developed:
ONE HYPOTHESIS
H0: Inventory valuation methods have no effect on the taxable income of Nigerian manufacturing firms.
H1: inventory valuation methods influence assessable income tax of
Nigerian manufacturing firms
TWO HYPOTHESIS
H0: The current economic parameters have no effect on the inventory valuation methods used by Nigerian manufacturing firms.
H1: The inventory valuation methods used by Nigerian manufacturing companies are influenced by the prevailing economic parameters.
THREE HYPOTHESIS
H0: Variations in inventory valuation methods have no effect on the financial reporting positions of Nigerian manufacturing firms.
H1: Variations in inventory valuation methods have an impact on the financial reporting positions of Nigerian manufacturing firms.
1.6 THE STUDY’S SIGNIFICANCE
The importance of stock (inventory) valuation cannot be overstated. This study is significant in the following ways:
1. It will determine whether inventory valuation methods are important in ensuring the firm’s accountability.
2. It will determine the role of a firm’s inventory account department.
valuation.
3. It will examine what true and fair means in terms of inventory valuation.
4. It will investigate the causes of firms’ misrepresentation of their true and fair view of their financial statements and make useful recommendations to put an end to the practice.
5. It will make helpful suggestions to make the store manager more efficient in preparing or advancing adequate data that will lend credibility to a true and fair view of a company’s operation and financial statements.
6. It will assist companies that want to change their methods but are unable to identify the impact of the various methods on their financial statements in light of the current economic situation.
7. It will be useful to other researchers and businesses as reference material, and the recommendations will be very useful for organizations that are having difficulty applying inventory valuation methods.
1.7 THE STUDY’S OBJECTIVE
This research will be limited to the use of questionnaires and oral interviews as appropriate, as well as a review of related literature (relevant books, journals, etc.) that will provide an adequate and long-term solution to the inventory valuation problem. Data will be collected from three manufacturing companies in Enugu state: Emenite Limited, Innoson Industrial and Technical Company Limited, and Alo Aluminum Manufacturing Company.
Furthermore, the research is limited to examining the impact of various methods of inventory valuation on a company’s financial statements, with a focus on:
Profits that are taxed on corporations.
Amount of tax payable by firms under various methods,
The cost of goods sold reported using the methods
,
Closing stock prices reported using these methods,
Potential and actual investors in companies make decisions based on available divisible profits.
1.8 THE STUDY’S LIMITATIONS
During the course of this research project, the researcher encounters issues that may be attributed to;
1. Untrustworthy or irrelevant information gleaned from oral interviews This was determined by the respondents’ honesty in answering the questions asked during the oral interview. Some respondents believed the research was intended to expose their company and were thus unwilling to provide adequate and relevant information.
2. Due to time constraints, the researcher was limited to using only the LIFO (Last-In, First-Out), FIFO (First-In, First-Out), and WAM (Weighted Average method) of inventory valuation.
3. The researcher encountered the issue of not receiving all of the questionnaires distributed to respondents for responses.
1.9 TERMS AND CONDITIONS
A. Inventories
This is also referred to as stock. These are assets held for sale in the normal course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the manufacturing process or in the provision of services.
FINANCIAL STATEMENTS B.
These are the statements that are generated at the end of accounting periods, such as the income statement, cash flow statement, and statement of financial position. They are summaries of the financial situation. They are reports that summarize a company’s financial position and operating results.
C. INVENTORY VALUATION CONSISTENCY
This is an accounting standard that requires the use of the same method of inventory pricing (valuation) from year to year, with full disclosure of any changes in method to improve the comparability of financial statements presented in the annual report.
D. MANUFACTURING BUSINESSES
These are businesses that effectively combine men, materials, and machinery with the goal of producing goods for human consumption while also making a profit to keep the business running.
BUFFER STOCK E.
It is extra inventory held in excess of what is required to meet normal demand, resulting in the avoidance of stock out. It could also be called a safety stock.
F. IN- PROGRESS WORK
This is a component of a manufacturer’s inventory that has not yet been completed and transferred to the finished goods inventory.
G. OUT OF STOCK
This occurs when a manufacturing company’s or a store’s stores department runs out of a particular type of stock before the next order arrives.
H. TAXABLE INCOME
This is the amount of income (after deducting expenses from gross income) from each source in the year preceding the assessment.
REFERENCES
E. Omolehinwa (2011).
Managing Cost Accounting (2nd Edition), Pumark
Nigeria Limited
Adeniyi, Adeniyi, Adeniyi, Adeniyi (2009).
A managerial approach to cost accounting. El –Toda business ventures
ltd.
Horngren,E.T(1982).
Accounting for costs. An emphasis on management (5th Edition)
Prentice Hall, London.
Lucy and T (1984). Eastheigh Hants: D. P publications, costing; an instructional manual
A. U. Nweze (2004).
The quantitative approach to management accounting (3rd edition)
Enugu: Computer edge publishers, edition.
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A COMPARATIVE ANALYSIS OF THE IMPACT OF INVENTORY VALUATION METHODS ON FINANCIAL REPORT STATEMENT IN SOME MANUFACTURING COMPANIES.
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