ABSTRACT
This research work was conducted on with special reference to the
impact inventoryvaluation methods has on financial report statements of
manufacturing companies. For a longtime now the Accounting profession
has not been able to come up with any particular technique or method to
be used uniformly in valuing inventory. This research work examined if
the method used was as a result ofthe prevailing economic circumstances.
A survey research design was adopted for the study; data collected
weregotten from both the primary and secondary sources. An infinite
population of over 3000 was used and a finite population of 220. Three
hypotheses were tested at 5 percent level of significance. Tables and
percentages were employed to answer the questionnaires while the
statistical regression coefficient analysis and Z- test were used to
test the hypotheses. It was found amongst others that the prevailing
economic parameter influences the decision of choice of inventory
valuation method used. The Accounting professional bodies should try as
much as possible to adopt a particular method of inventory valuation and
the weighted average method was recommended as a method that can
withstand any economic challenges
TABLE OF CONTENTS
TITLE PAGE…………………………………………….…………………i
APPROVAL PAGE………………………………………………………..ii
DEDICATION…………………………………………………..…………iii
ACKNOWLEDGMENTS…………………………………………….……iv
ABSTRACT………………………………………………………………...v
TABLE OF CONTENTS…………………………………………………..vi
CHAPTER ONE: INTRODUCTION
1.1BACKGROUND OF STUDY………………………………………1
1.2STATEMENT OF THE PROBLEM……………………………..…4
1.3OBJECTIVES OF STUDY……………………………………….....5
1.4RESEARCH QUESTIONS………………………………………….5
1.5 HYPOTHESES……………………………………………………...6
1.6 SIGNIFICANCE OF THE STUDY………………………………...7
1.7 SCOPE OF THE STUDY……………………………………..........8
1.8 LIMITATION OF THE STUDY.....................................................9
1.9 DEFINITION OF TERMS……………………………………..…..10
CHAPTER TWO:LITERATURE REVIEW
2.1 HISTORY PERSPECTIVE………………………………..………..13
2.2 THE PROBLEM OF INVENTORY MANAGEMENT………..…..14
2.3 INVENTORY VALUATION………………………………………..16
2.4 INVENTORY VALUATION METHODS…………………….……20
REFERENCE……….......................................................................37
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 INTRODUCTION.……………………………………….……………39
3.3 AREA OF THE STUDY……………………………….……………...40
3.4 POULATION OF THE STUDY………………………………………41
3.5 SAMPLE SIZE AND SAMPLINGTECHNIQUES……………….…41
3.6 INSTRUMENT OF DATA COLLECTION……………………….…44
3.7 VALIDITY OF THE INSTRUMENT …….………………………....45
3.8 RELIABILITY OF INSTRUMENT ……………………………...…..45
3.9 METHOD OF DATA COLLECTION………………………………..46
3.10 METHOD OF DATA ANALYSIS…………………………………...46
CHAPTER FOUR:DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1DATA ANALYSIS………………………………..………………….....49
4.2 TESTING OF HYPOTHESES ……………………….………………...66
CHAPTER FIVE:SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 SUMMARY OF FINDINGS…………………………………………..82
5.2 RECOMMENDATIONS……………………………………………....84
5.3 CONCLUSION…………………………………………………...........86 BIBLIOGRAPHY………………………………………………………88
APPENDIX A…………………………………………………...……...90
APPENDIX B…………………………………………………………….9
CHAPTER ONE
1.0INTRODUCTION
1.1BACKGROUND OF THE STUDY
Inventory valuation allows companies to provide a monetary value for items that make up their inventory (stock).
Inventories are usually the largest current asset of a business and
are as important as funds (cash). It is a form of fund tied up in assets
(current assets). Its proper or accurate measurement or valuation
cannot be overlooked as it forms a greater percentage of an enterprise’s
current assets in particular and a total asset in general. For
manufacturing companies, inventories usually represent approximately 20
to 60 percent (%) of their assets. If inventory is not properly valued,
it may result that expenses and revenue may as well not be properly
matched and a company could make poor business decisions that will
affect the company’s profit. It is essential the way assets are valued
because it could be attributable to the numerous benefits which an
organization stands to gain by keeping an accurately valued stock that
meet shareholders needs, demands for financial information and also the
relevant specification of a particular organization. However, it will be
a waste of time if the record accuracy is poor.
Inventory in manufacturing company or concern comprises of the following components:
§ Raw materials inventory
§ Work- in- progress (semi- finished goods) inventory
§ Finished goods inventory
These components show the relationship between production and sales,
and it enables an organization to offer better service to its customers
at a reasonable price.
However, the technique or method used in the valuation of
inventories varies and the values placed on inventories vary in time
with the prevailing economic parameters (inflation, deflation or static
economy) and it can also be influenced by the management policy of the
organization. For instance, if the objective of an enterprise is that of
profit maximization, it may result to the use of a particular method so
as to disclose lower profit, thereby using excess fund at its disposal
to expand its operations. This type of organization may discard other
methods of valuing inventories in favour of the method that suit it
objectives.
According to Nwoha (2006:69), no area of accounting has produced
wider difference in practice than the computation of amount at which
inventories (stocks) and work-in-progress as stated in financial
account.
Inventory valuation method used by an enterprise is determined by a
number of reasons. These include inflation, differences in quantity
discounts, frequent changes in prices of commodity, buying from
different suppliers and also the nature of items or product. For
instance a company that deals on perishable goods, let’s say a grocery
store, prefers an inventory valuation method that recognizes the out
flow of goods that were first in stock. This arises as a result of the
perish ability of the items treated and the high turnover rate could
also be accounted for this choice of method FIFO (first-in, first-out).
The level of the three component of the inventory stated earlier differs
among organizations depending on the nature and volume of operation
undertaken. Manufacturing companies have a high level of raw material
inventory and semi-finished goods inventory as it is found in the
grocery stores. Considering the large sums of money tied up in inventory
as earlier stated, Horngren and Foster (2004:756) pointed out that it
is pertinent to have an
“information model” as a result of the obvious fact that if stock
matters (receipts, issues and controls) are not properly handled, it
would go a long way to jeopardize the financial status (liquidity) as
well as the profitability position of the firm. Hence, this research
work is a step in the right direction to address and highlight the role
of account professional towards the achievement of choosing and adopting
appropriate inventory valuation methods for each group of industry.
1.2 STATEMENT OF THE PROBLEMS
For a long time now the accounting profession has not been able to
come up with any particular techniques to be used uniformly in valuing
inventories. Various accounting bodies strongly recommend one method or
the other. As each method used has its effect on profits and closing
inventory figures. This paves way to differing tax assessments and
brings about a situation whereby some organizations are over assessed
(overtaxed) while others are under assessed. This also bedevils the
comparability of one firm’s performance with that of another though they
may be in the same line of business when an investor is attempting to
invest his capital in a firm.
However, each body or organization purports being consistent with
the use of certain valuation methods yet some companies adopt the method
which gives them 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 method adopted by the companies
enables them to pay less tax to the government. The problem in
achieving a statutory consensus compliance method in the administration
of inventory valuation by Nigerian manufacturing industry has persisted.
An appropriate forum of diverse accounting professional bodies is
required to reach a consensus on the issues of choosing and adopting
appropriate inventory valuation methods for each group of industry.
Hence, this research work is a step in the right direction to address
the role of accounting professional towards the achievement of the
objective.
1.3 OBJECTIVES OF THE STUDY
The aim of this research work includes the following:
1. To determine whether inventory valuation methods have any
impact on the assessable income tax of Nigerian manufacturing company.
2. To ascertain whether the prevailing economic parameters
influences the inventory valuation method used by Nigerian manufacturing
company.
3. To determine whether variances in inventory valuation methods
affect financial reporting positions of Nigerian manufacturing company.
4. To provide an acceptable basis for valuing inventory on hand.
5. To evaluate certain limiting factors faced by accountants in inventory
valuation.
6. To make recommendations based on findings.
1.4 RESEARCH QUESTIONS
The following questions are formulated for the purpose of this study;
1. Does an inventory valuation method have any impact on the assessable income tax of Nigerian manufacturing company?
2. What influence does the prevailing economic parameter have on
the inventory valuation method used by Nigerian manufacturing company?
3. To what extent does the variance in inventory valuation method
affect financial reporting positions of Nigerian manufacturing
companies?
1.5 HYPOTHESES
The following hypotheses are formulated to help achieve the purpose of the study:
HYPOTHESIS ONE
H0: inventory valuation methods do not have any impact on the assessable income tax of Nigerian manufacturing companies.
H1: inventory valuation methods have an impact on the assessable income tax of
Nigerian manufacturing companies.
HYPOTHESIS TWO
H0: the prevailing economic parameters do not influence the inventory valuation methods used by Nigerian manufacturing companies.
H1: The prevailing economic parameter influences the inventory valuation methods used by Nigerian manufacturing companies.
HYPOTHESIS THREE
H0: the variance in inventory valuation methods does not affect financial reporting positions of Nigerian manufacturing companies.
H1: the variances in inventory valuation methods 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:
1. It will determine if inventory valuation methods play any significant role in ensuring the firms accountability.
2. It will determine the role of account department of a firm’s inventory
valuation.
3. It will x-ray what true and fair means with regard to inventory valuation.
4. It will determine the causes of misrepresentation of true
and fair view of financial statement of firms and usher useful
suggestions to stop the practice.
5. It will offer useful suggestions towards making the store
manager more efficient in preparing or advancing adequate data that will
lend credibility to a true and fair view of a firms operation and
financial statement.
6. It shall serve as an aid to companies that want to change
their methods but are unable to identify the impact of the different
methods on their financial statements under prevailing economic
situation.
7. It will be meaningful to other researchers and business for
it will serve as reference material and the recommendation will be very
useful for organizations that have problems in their application of
inventory valuation methods.
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, journals, etc.) that would provide adequate and lasting
solution to the problem of inventory valuation. Data collection will be
restricted to three manufacturing companies which are Emenite limited,
Innoson industrial and technical company limited and Alo aluminum
manufacturing company all in Enugu state.
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:
§ Tax assessable profits on companies.
§ Amount of tax payable by firms under the different methods,
§ The cost of goods sold value reported under the methods,
§ Closing stock values reported under these methods,
§ The decision of the potential and actual investors in the companies based on available divisible profits.
1.8 LIMITATIONS OF THE STUDY
In carrying out this research project, the researcher encounters problems which may be attributed to;
1. Unreliable or irrelevant information obtained from oral
interviews. This was based on the degree of the respondents 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.
2. As a result of time the researcher was restricted to just the
LIFO (Last-In, First-Out), FIFO (First-In, First-Out) and the WAM
(Weighted Average method) of inventory valuation.
3. 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 or in rendering of services.
B. FINANCIAL STATEMENTS
These are statements produced at the end of accounting periods, such
as income statement, cash flow and statement of financial position.
They are reports which summarize the financial position. They are
reports which summarize the financial position and operating results of a
business.
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 ongoing 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 a 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 type of stock before the next order
arrives.
H. ASSESSABLE INCOME
This is the amount of income (after charging expenses against the
gross income) from each source in the year immediately preceding the
year of assessment.
REFERENCES
Omolehinwa, E. O (2011).Coping with Cost Accounting (2nd Edition) Pumark
Nigeria Ltd.
Adeniyi, A.A(2009).Cost Accounting; A managerial approach. El –Toda ventures
ltd.
Horngren,E.T(1982).Cost Accounting. A managerial emphasis (5th Edition)
London: Prentice hall.
Lucy, T (1984). Costing; An instructional manual,Eastheigh Hants: D. P publications
Nweze, A. U (2004).Quantitative approachto management accounting (3rd
Edition) Enugu: Computer edge publishers.