Inventory Valuation Methods on Financial Report Statements in Some Manufacturing Companies in Saudi Arabia

Abstract

This research paper was written about the impact that inventory valuation methods have on the financial report statements of some manufacturing firms. For some time, the accounting profession has not succeeded in coming up with the appropriate method or technique that can be applied uniformly to value inventory. This research work was carried out to examine if the various methods applied in some manufacturing firms were due to the prevailing circumstances on the economy. The firms targeted were those using IFRS (international financial reporting standards) only. A survey research method was used in this study as data collection was obtained from both primary sources and relevant secondary references. An infinite population of more than 3000 was used together with a finite population of 200. The researcher used three hypotheses testing them at a 5% significance level. Percentages and tables were utilized to offer answers to the questionnaires while analysis was done using the Z-test and statistical regression coefficient to test the three hypotheses. From the research, it was found out that amongst other findings, the economic parameters that prevail at any given moment influence the decision towards the choosing of inventory valuation methods applied by companies. in this case, the bodies related to the accounting profession should try to the best of their ability to adapt at least a particular method of evaluating inventory. The method on weighted average was recommended as the best method that can withstand all sorts of economic challenges.

Chapter one

Introduction

Background information

Inventory valuation helps firms to offer a monetary value for all items making up their stock or inventory. These inventories are of much importance as cash or funds and usually make up the largest form of current asset in any business. They are a form of cash that is tied up in the assets usually the current assets. Businesses cannot overlook the accuracy or proper valuation or measurement since it forms a significant percentage of the firm's current assets specifically and at the same time total assets in general. for companies that manufacture products, this percentage represents approximately between 20 and 60 of the total assets. in this case, if inventory is not valued well enough, it means that revenue and expenses will not be matched well and this results in the companies making poor decisions in the business operations that then affect the profits made. it is thus of great importance that assets are valued well as they attribute to the numerous benefits that these companies stand to gain out of proper and accurate valuing of stock. Accurate stock valuation means that the needs of stakeholders, financial information demands, and the other relevant specifications of these firms are well met. on the same note, it would be time-wasting to have poorly accurate records made at any given moment. any inventory in the manufacturing companies is comprised of the components below;

inventory for raw materials

semi-finished goods or work in progress inventory

inventory for finished goods

All of the above components indicate a relationship between sales and production and thus enable organizations to provide better services to all the customers at reasonable prices. However, the methods or techniques applied in doing inventory valuation vary while the values that are placed in the inventories also vary in time based on the economic parameters that prevail at any given time. Such parameters include deflation, static economy, or inflation. The same values can also be affected by the policies of management that the organizations apply. For instance, if an enterprise has profit maximization as its objective, its management may decide to apply a given method so that they disclose low profits by suing more funds at their disposal to have the enterprise operations expanded. In this case, the management may discard all other methods of inventory valuation and choose the one method that best suits its primary objective. According to research, no one field of accounting has been able to produce a wider difference during practice than the proper computation of the total amount at which work in progress and stock inventories are stated in the accounts of finance.

Many different reasons determine the inventory valuation methods that different organizations use. These include differences in quantity discounts, inflation, buying from distinct suppliers, frequent variations in the prices of items, and the nature of products or items. for instance, an enterprise that deals with goods that are perishable like a grocery store will most likely prefer a method of inventory valuation that can recognize the outflow of those goods that were stocked first. This comes due to the level of the perishability of the products being handled and the rate of high turnover could also allow the chosen method to be accounted for which is, in this case, is FIFO (first in, first out). The levels of the above-mentioned components of inventory are different from one organization to the other depending on the volume and nature of operations being undertaken. the manufacturing firms usually have higher levels of materials and semi-finished goods inventories as is the case of the grocery stores than the other types of enterprises. Considering the huge sums of cash that are tied up in the inventories, as mentioned earlier, research points out the fact that it is essential to have in place a strong information model to handle them. this fact is due to the obvious fact that when matters of stock such as issues, controls, and receipts are not handled properly, it goes a long way as to jeopardize the liquidity or financial status together with the firm's profitability position. In this regard, this research work marks a step towards the right direction in addressing and highlighting the roles that the accounting profession has towards achieving success in adopting and choosing the most appropriate inventory method of valuation for all groups of industries.

1.2 Problem statement

For quite some time, till now, the accounting profession has not succeeded in coming up with the appropriate method or technique that can be applied uniformly to value inventory. In addition to this point, many different bodies related to accounting strongly differ in their recommendation of one method to another. This is because each of the recommended methods applied has its impact on the organizational profits and figures of closing the inventories. This issue paves the way to different tax assessments and still creates a case whereby there is usually over-assessing or over-taxing in some firms while the others are being under-taxed or assessed. In addition, this fact bedevils a firm's performance comparability with that of others regardless of them being in the same line of operating business before an investor tries to invest their capital in a particular enterprise.

However, each of the organizations purports to be consistent with the application of a given method of inventory valuation. some firms will adopt the valuation method that can offer them some advantage over the other recommended techniques or rely on the technique that is recommended by the BIR (board of internal revenue) or the FBIR (federal board of inland revenue) for purposes of tax assessment. Any method that the firm applies should be able to enable them to pay the lowest possible tax to the government. The challenge of coming up with a statutory consensus method of compliance in the inventory valuation administration by the manufacturing firms in Saudi Arabia becomes persisted. In this regard, an appropriate forum involving diverse bodies of professional accounting is needed to come to terms concerning the issues of adopting and choosing the best method of inventory valuation for every industrial group in operation. Hence, this research work marks a step towards the right direction in addressing the roles played by accounting professionals to achieve this important objective.

Objectives of the research

The major objectives of this work of research include the following;

To find out whether methods of inventory valuation have any impact on the financial report statement in some manufacturing companies in Saudi Arabia

To confirm whether the economic parameters that prevail at any given time influence the methods of inventory valuation used by Saudi Arabian firms

To determine whether the methods of inventory valuation have any impact on the income tax that is accessible to the Saudi Arabian firms

To offer an acceptable foundation for inventory valuation at hand

To assess the limiting factors that accountants, face in valuating inventory

To make reasonable recommendations based on the research findings

Research questions

does a method of inventory valuation have an impact on the financial report statement in some manufacturing companies in Saudi Arabia

what influence do the prevailing economic parameters have on the methods of inventory valuation used by Saudi Arabian firms

does the method of inventory valuation have any impact on the income tax that is accessible to the Saudi Arabian firms

Hypotheses

The following types of hypotheses were formulated to help in achieving the sole purpose of the research;

Hypothesis one

H0. The method of inventory valuation has an impact on the financial report statement in some manufacturing companies in Saudi Arabia

H1. The method of inventory valuation does not have an impact on the financial report statement in some manufacturing companies in Saudi Arabia

Hypothesis two

H0. The prevailing parameters of the economy at any given moment influences the methods of inventory valuation used by Saudi Arabian firms

H1. The prevailing parameters of the economy at any given moment does not influence the methods of inventory valuation used by Saudi Arabian firms

Hypothesis three

H0. The method of inventory valuation has an impact on the income tax that is accessible to the Saudi Arabian firms

H1. The method of inventory valuation does not have an impact on the income tax that is accessible to the Saudi Arabian firms

Significance of the study

The accurate inventory valuation in manufacturing firms cannot be overlooked. the outcome of this study will be significant in the following ways;

It will find out whether methods of inventory valuation have any significant role in determining the accountability of firms

It will look into what fair and true mean about valuation of inventory

It will determine the role played by the accounts department in the valuation of a firms inventory

It is meant to offer meaningful suggestions to store managers to increase their efficiency in advancing or preparing adequate data that lends credibility to a fair and true view of the financial statements and operations of a firm

It is meant to determine what causes misrepresentation of a fair and true view of a firms financial statements and provide meaningful suggestions to end the practice

It will serve as useful reference material to businesses and researchers while the recommendations will help organizations having issues in their daily application of the various methods of inventory valuation

It shall aid firms that need to change their inventory valuation methods but cannot identify the impact that various methods have on their statements of finance under any prevailing situations of the economy...