Impact Of Inventory Valuation And The Profitability Of An Organization (A Case Study Of Champion Breweries)
Chapter One
Introduction
1.1 Background Of The Study
The complex nature of today’s business world and the transformation of the entire world into a global village have been of great concern to managers of all forms of business organization. Because of this, managers are making conscious efforts researching on the most effective and efficient inventory valuation methods that will facilitate adequate profitability. The subject of this research is to determine the extent to which inventory valuation can facilitate profitability.
However, the word inventory, as known by the Americans and stock by British is indispensable in any manufacturing, merchandising and servicing organization. According to Welsch et al (1982: 222) “inventories are assets consisting of goods owned by the business at a particular time and held for future sales or for utilization in the manufacturing of goods for sales”. The types of inventories available differ depending on the nature of the business undertaking. For instance, a manufacturing company will make use of a raw material; work -in -progress and finished goods inventories, while trading organizations will make use of only finished goods inventories. Inventory generally represents an active asset because of their constant usage and replacement Pugh and seizer (1980: P .233). Therefore, the problem of safeguarding inventories is akin to protecting profit. The profitability of any manufacturing company is hindered by inadequately controlling the danger associated with inventory management. That is, over investment and under investment in inventory. Advisability of adequate stocking of items for sales coupled with the risk of loss and cost of over stocking, create critical management planning and control problems. Failure to value inventories and to account for inventories can lead to business failure. Therefore in valuing inventory, the company’s objectives should be wealth maximization, which can be achieved by determining the optimum level of inventory sufficient for profit maximization.
However, inventory valuation in an organization is one of the key ingredients for efficient performance, which is further translation into profitability. Further more, inventory valuation involves the making of decision on the level of inventory that may be economically needed to meet the requirements for planned production and maximization of profit. Since all manufacturing companies are assumed to be “going concern”, long term survival, which comes from profitability is sometimes adjudged to be, the most important business objective. No manufacturing company can operate without material inputs, which in turn determine its output. Before any company is said to have effectively implemented its inventory valuation methods, there must have been an internal communications between different units and departments. The department of sales / marketing are the first to spot out changes in demand. This change must be worked into the company purchasing and manufacturing schedules, and the financial manager must arrange any financing that will be needed to support the inventory build-up. Therefore the neglecting of the inventory valuation will jeopardizes its long —run profitability and may fail ultimately neglecting of the inventory valuation will jeopardizes its long -run profitability and may fail ultimately.
1.2 Statement Of The Problems
In recent time emphasis has been layed on the importance of inventory valuation in manufacturing companies. This has help in solving most problems like Business failure, loss of sales, production stoppages and customer’s dissatisfaction, Although the potential benefits of improved inventory valuation are enormous, most companies fail to value inventory effectively.
When products purchased are delivered in several different batched, at different prices, the products are mixed together in the store so that it is impossible to say whether the items remaining at the end of the period are part of the original opening stock or part of what has been purchased during the period. This result in the problem of which price to use when valuing inventory.
Inventory valuation problem has been a recurring one. Is it due to the facts that there are several different inventory valuation methods or ignorance of the existence of such method?
1.3 Objectives Of The Study
The aim of this research work includes the following:
To determine whether inventory valuation methods have any impact on the assessable income tax of Nigerian manufacturing company.
To ascertain whether the prevailing economic parameters influences the inventory valuation method used by Nigerian manufacturing company.
To determine whether variances in inventory valuation methods affect financial reporting positions of Nigeria manufacturing company.
To provide an acceptable basis for valuing inventory on hand.
1.4 Research Questions
The following questions are formulated for the purpose of this study;
Does inventory valuation method have any impact on the assessable income tax of Nigerian manufacturing company?
What influence does the prevailing economic parameter have on the inventory valuation method used by Nigerian manufacturing company?
To what extent does the variance in inventory valuation method affect financial reporting positions of Nigerian manufacturing company?
1.5 Research Hypotheses
The following hypotheses are formulated to help achieve the purpose of the study;
Ho: Inventory valuation methods do not have any impact on the assessable income tax of Nigerian manufacturing companies.
Ho: The prevailing economic parameters do not influence the inventory valuation method used by Nigerian manufacturing companies.
H0: The variance in inventory valuation methods does not affect financial reporting positions of Nigerian manufacturing companies.
1.6 Significance Of The Study
The proper valuation of stock (inventory) cannot be over looked, This research work is significant in the following ways:
It will determine if inventory valuation methods play any significant role in ensuring the firms accountability
It will determine the role of account department of a firm’s inventory valuation.
It will x-ray what true and fair means with regard to inventory valuation.
It will determine the cause of misrepresentation of true and fair view or financial statement of firms and usher useful suggestions to stop the practice.
1.7 Scope Of The Study
This research work will be limited to the use of questionnaire and oral interview where appropriate and to a review of related literature (relevant books, journal, etc) that would provide adequate and lasting saluting to the problem o inventory valuation.
Furthermore, the study is equally limited to the study of the impact of the different methods on inventory valuation on company’s financial statement with particular reference to its effect on:
The cost of goods sold value reported under the methods,
Closing stock values reported under these methods,
The decision of the potential and actual inventors in the companies based on available divisible profits.
1.8 Limitation Of The Study
In carrying out this research project, the researcher encounters problems which may be attributed to;
Unreliable or irrelevant information obtained from oral interviews. This was based on the degree of the respondent’s truthfulness in answering the questions asked during the oral interview. Some respondent thought the research was to expose their company and thus were unwilling to give adequate and relevant information.
As a result of time the researcher was restricted to just the LIFO (1ast-n, First-Out), FIFO (First-in, First-Out) and the WAM (Weighted Average Method) of inventory valuation.
The researcher encountered the problem of not getting back all the questionnaires administered to respondents for responses.
1.9 Definition Of Terms
A. Inventory
This is also known as stock. These are assets held for sale in the ordinary course of business, in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process o n rendering of services.
B. Beneficial Statements
These are statement produced at the end of accounting periods, such as income statement, cash flow and statement of financial position. They are report which summarizes the financial position.
C. Consistency In Inventory Valuation
This is an accounting standard which demands for the use of the same method of inventory pricing (valuation) from year to year, with full disclosure of the effect of any change in method to enhance the comparability of financial statements presented in the annual report.
D. Manufacturing Companies
These are establishments that combine men, materials and machinery in an effective manner with the aim of producing goods for human consumption and also to make profit for the on going of the business.
E. Buffer Stock
It is an additional inventory held in excess of that needed to meet normal demand and which leads to avoidance of stock out. It could also be referred to as safety stock.
F. Work-in-progress
This is part of manufacturer’s inventory that is in the production process and has not yet been completed and transferred to the finished goods inventory.
G. Stock Out
This refers to when the stores department of a manufacturing company, or a store runs out of a types of stock before the next order arrives.
H. Assessable Income
This is the amount of income (after charges expenses against the gross income) from each source in the year immediately preceding the year of assessment.
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