A comparative analysis of the impact of inventory valuation methods on financial report statement in some manufacturing companies in enugu state

Thesis Overview

<p> 1.0 INTRODUCTION<br>1.1BACKGROUND OF THE STUDY<br>Inventory valuation allows companies to provide a monetary value for items<br>that make up their inventory (stock).<br>Inventories are usually the largest current asset of a business and are as<br>important as funds (cash). It is a form of fund tied up in assets (current assets). It‟s<br>proper or accurate measurement or valuation cannot be overlooked as it forms a<br>greater percentage of an enterprise‟s current assets in particular and a total asset in<br>general. For manufacturing companies, inventories usually represent<br>approximately 20 to 60 percent (%) of their assets. If inventory is not properly<br>valued, it may result that expenses and revenue may as well not be properly<br>matched and a company could make poor business decisions that will affect the<br>company‟s profit. It is essential the way assets are valued because it could be<br>attributable to the numerous benefits which an organization stands to gain by<br>keeping an accurately valued stock that meet shareholders needs, demands for<br>financial information and also the relevant specification of a particular<br>organization. However, it will be a waste of time if the record accuracy is poor.<br>11<br>Inventory in manufacturing company or concern comprises of the following<br>components:<br> Raw materials inventory<br> Work- in- progress (semi- finished goods) inventory<br> Finished goods inventory<br>These components show the relationship between production and sales, and<br>it enables an organization to offer better service to its customers at a reasonable<br>price.<br>However, the technique or method used in the valuation of inventories varies<br>and the values placed on inventories vary in time with the prevailing economic<br>parameters (inflation, deflation or static economy) and it can also be influenced by<br>the management policy of the organization. For instance, if the objective of an<br>enterprise is that of profit maximization, it may result to the use of a particular<br>method so as to disclose lower profit, thereby using excess fund at its disposal to<br>expand its operations. This type of organization may discard other methods of<br>valuing inventories in favour of the method that suit it objectives.<br>According to Nwoha (2006:69), no area of accounting has produced wider<br>difference in practice than the computation of amount at which inventories (stocks)<br>and work-in-progress as stated in financial account.<br>12<br>Inventory valuation method used by an enterprise is determined by a number<br>of reasons. These include inflation, differences in quantity discounts, frequent<br>changes in prices of commodity, buying from different suppliers and also the<br>nature of items or product. For instance a company that deals on perishable goods,<br>let‟s say a grocery store, prefers an inventory valuation method that recognizes the<br>out flow of goods that were first in stock. This arises as a result of the perish ability<br>of the items treated and the high turnover rate could also be accounted for this<br>choice of method FIFO (first-in, first-out). The level of the three component of the<br>inventory stated earlier differs among organizations depending on the nature and<br>volume of operation undertaken. Manufacturing companies have a high level of<br>raw material inventory and semi-finished goods inventory as it is found in the<br>grocery stores. Considering the large sums of money tied up in inventory as earlier<br>stated, Horngren and Foster (2004:756) pointed out that it is pertinent to have an<br>“information model” as a result of the obvious fact that if stock matters (receipts,<br>issues and controls) are not properly handled, it would go a long way to jeopardize<br>the financial status (liquidity) as well as the profitability position of the firm.<br>Hence, this research work is a step in the right direction to address and highlight<br>the role of account professional towards the achievement of choosing and adopting<br>appropriate inventory valuation methods for each group of industry.<br>13<br>1.2STATEMENT OF THE PROBLEMS<br>For a long time now the accounting profession has not been able to come up<br>with any particular techniques to be used uniformly in valuing inventories. Various<br>accounting bodies strongly recommend one method or the other. As each method<br>used has its effect on profits and closing inventory figures. This paves way to<br>differing tax assessments and brings about a situation whereby some organizations<br>are over assessed (overtaxed) while others are under assessed. This also bedevils<br>the comparability of one firm‟s performance with that of another though they may<br>be in the same line of business when an investor is attempting to invest his capital<br>in a firm.<br>However, each body or organization purports being consistent with the use<br>of certain valuation methods yet some companies adopt the method which gives<br>them advantage over any other recommended method or method accepted by the<br>Board of Internal Revenue, or Federal Board of Inland Revenue for tax assessment<br>purposes. The method adopted by the companies enables them to pay less tax to<br>the government. The problem in achieving a statutory consensus compliance<br>method in the administration of inventory valuation by Nigerian manufacturing<br>industry has persisted. An appropriate forum of diverse accounting professional<br>bodies is required to reach a consensus on the issues of choosing and adopting<br>appropriate inventory valuation methods for each group of industry. Hence, this<br>14<br>research work is a step in the right direction to address the role of accounting<br>professional towards the achievement of the objective.<br>1.3OBJECTIVES OF THE STUDY<br>The aim of this research work includes the following:<br>1. To determine whether inventory valuation methods have any impact on the<br>assessable income tax of Nigerian manufacturing company.<br>2. To ascertain whether the prevailing economic parameters influences the<br>inventory valuation method used by Nigerian manufacturing company.<br>3. To determine whether variances in inventory valuation methods affect<br>financial reporting positions of Nigerian manufacturing company.<br>4. To provide an acceptable basis for valuing inventory on hand.<br>5. To evaluate certain limiting factors faced by accountants in inventory<br>valuation.<br>6. To make recommendations based on findings.<br>1.4 RESEARCH QUESTIONS<br>The following questions are formulated for the purpose of this study;<br>1. Does an inventory valuation method have any impact on the assessable<br>income tax of Nigerian manufacturing company?<br>15<br>2. What influence does the prevailing economic parameter have on the<br>inventory valuation method used by Nigerian manufacturing company?<br>3. To what extent does the variance in inventory valuation method affect<br>financial reporting positions of Nigerian manufacturing companies?<br>1.5 HYPOTHESES<br>The following hypotheses are formulated to help achieve the purpose of the<br>study:<br>HYPOTHESIS ONE<br>H0: inventory valuation methods do not have any impact on the assessable income<br>tax of Nigerian manufacturing companies.<br>H1: inventory valuation methods have an impact on the assessable income tax of<br>Nigerian manufacturing companies.<br>HYPOTHESIS TWO<br>H0: the prevailing economic parameters do not influence the inventory valuation<br>methods used by Nigerian manufacturing companies.<br>H1: The prevailing economic parameter influences the inventory valuation methods<br>used by Nigerian manufacturing companies. <br></p>