Inventory valuation plays an important role in determining the profits of present and succeeding years of a company. For example, if the closing stock is overvalued, it enhances the profit of the current year and as a opening stock of next year it reduces the profit shown in the profit and loss account of that year.
It is the duty of the management to correctly value the inventories at hand and to disclose them in the balance sheet.
Responsibilities of the Management in Inventory valuation
The following are the responsibilities of the management with regard to the valuing of inventories.
1. Only the inventories that are owned by the organization should be disclosed in the financial statements.
2. The inventories that are disclosed in the financial statements should be in existence.
3. The generally accepted accounting principles should be applied to value Inventories.
4. That all the inventories are to be physically verified at least once in a year.
5. If the organization is a company,
- opening stock, closing stock and work-in-progress shall be disclosed in profit and loss account.
- The method of valuation of inventories is to be disclosed and if there is any change in the method of valuation, the effect of such a change in the profit is to be disclosed.
- Quantitative details as to purchase, opening and closing balance as regards to raw material, work-in-progress and finished goods should also be disclosed along with other financial statements.