ABSTRACT
This research work was conducted on with
special reference to the impact inventory valuation 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 of the prevailing economic circumstances. A survey
research design was adopted for the study; data collected were gotten 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
1.1 BACKGROUND OF STUDY………………………………………1
1.2 STATEMENT OF THE PROBLEM……………………………..…4
1.3 OBJECTIVES OF STUDY……………………………………….....5
1.4 RESEARCH 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
4.1 DATA
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
1.0 INTRODUCTION
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.
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