Master Thesis, School of Management and Economics, Växjö University, Advanced Concepts in Logistics Management, FED370, Spring 2006 Authors: Lina Friberg, Sofia Nilsson and Sofia Wärnbring Tutor: Petra Andersson Examiner: Lars-Olof Rask Title: Inventory Valuation - difficulties; what & why? Background: It is important to value inventories accurately in order to meet shareholder needs and demands for financial information. For manufacturing companies, inventories usually represent approximately 20 to 60 percent of their assets; hence it affects companies’ profits. It is essential in which way assets are valued, however, it will be a waste of time if the record accuracy level is poor. Research Questions: Why do companies experience problems when valuing inventories? In order to answer this research question, the following question also has to be answered: What problems can be identified? Purpose: The purpose of this master thesis is to describe and explain difficulties when valuing inventories. Limitations: We are not considering work-in-process and finished goods inventories, only raw material inventory. Neither are we looking at the companies’ internal calculation system, as we believe this will not be relevant for raw material. Method: We chose a positivistic view since we were studying our problem from a process perspective. A case study approach was suitable for us as our thesis was written in the form of a project, and we combined our empirical and theoretical data through the deductive approach. Conclusions: The problem of inventory valuation does not exist in the pricing aspect. Most problems are connected to quantity. Especially the daily routines were found to be insufficient, thus creating inaccuracies between the physical quantity in inventory and the quantity displayed in the system. Company B, the larger company, was found not to have as many problems as the smaller Company A has. Continued research: We believe an overall picture regarding valuation is needed, including the work-in-process and the finished goods inventories. Moreover, deficiencies are often not just found in the processes, but also the humans involved, and how they are motivated to secure accuracy. In addition, an implementation of cycle counting could be interesting to investigate.

<p>Master Thesis, School of Management and Economics, Växjö University, Advanced Concepts in Logistics Management, FED370, Spring 2006</p><p>Authors: Lina Friberg, Sofia Nilsson and Sofia Wärnbring</p><p>Tutor: Petra Andersson</p><p>Examiner: Lars-Olof Rask</p><p>Title: Inventory Valuation - difficulties; what & why?</p><p>Background: It is important to value inventories accurately in order to meet shareholder needs and demands for financial information. For manufacturing companies, inventories usually represent approximately 20 to 60 percent of their assets; hence it affects companies’ profits. It is essential in which way assets are valued, however, it will be a waste of time if the record accuracy level is poor.</p><p>Research Questions: Why do companies experience problems when valuing inventories? In order to answer this research question, the following question also has to be answered: What problems can be identified?</p><p>Purpose: The purpose of this master thesis is to describe and explain difficulties when valuing inventories.</p><p>Limitations: We are not considering work-in-process and finished goods inventories, only raw material inventory. Neither are we looking at the companies’ internal calculation system, as we believe this will not be relevant for raw material.</p><p>Method: We chose a positivistic view since we were studying our problem from a process perspective. A case study approach was suitable for us as our thesis was written in the form of a project, and we combined our empirical and theoretical data through the deductive approach.</p><p>Conclusions: The problem of inventory valuation does not exist in the pricing aspect. Most problems are connected to quantity. Especially the daily routines were found to be insufficient, thus creating inaccuracies between the physical quantity in inventory and the quantity displayed in the system. Company B, the larger company, was found not to have as many problems as the smaller Company A has.</p><p>Continued research: We believe an overall picture regarding valuation is needed, including the work-in-process and the finished goods inventories. Moreover, deficiencies are often not just found in the processes, but also the humans involved, and how they are motivated to secure accuracy. In addition, an implementation of cycle counting could be interesting to investigate.</p>

<p>I ett litet företag finns en risk att ledningen fokuserar så mycket på kärnverksamheten att övriga administrativa verksamheter åsidosätts. Exempelvis finns det risk att företaget inte har full kontroll på sina lager.</p><p>Syftet med den här uppsatsen är att beskriva och analysera värderingen och styrningen av lagret hos ett litet handelsföretag med butik och i förekommande fall ge förbättringsförslag.</p><p>Vi har dels studerat lagar och rekommendationer avseende hantering av lager samt litteratur inom området lagerstyrning i handelsföretag. Dessutom har vi intervjuat företrädare för ett typiskt litet handelsföretag.</p><p>Det undersökta företaget uppfyller gällande lagar och rekommendationer, men inte så mycket mer. Vidare använder sig företaget mestadels av känsla och erfarenhet i sin lagerstyrning. Förtaget använder alltså inte formella analyser och metoder i någon större utsträckning, om ens någon. Vi har några förslag på förbättringar i detta avseende.</p> / <p>In a small company there is a risk that the management focuses so much on the core business that other administrative tasks are ignored. For example, there is a risk that the company does not control its inventories efficiently.</p><p>The purpose of this thesis is to describe and analyze the valuing and control of the inventory in a small retail company with a store and, where appropriate, give suggestions for improvement.</p><p>We have studied laws and recommendations regarding inventory valuation and other literature regarding inventory control in retail companies. Additionally we have interviewed representatives for a typical small retail company.</p><p>The investigated company does comply with applicable laws and recommendations, but not much more. Furthermore, the company uses mostly feel and experience in its inventory control. The company does not use formal inventory control in any great extent, if any. We have some suggestions for improvements in this regard.</p>

<p><strong>Problemformuleringar:</strong> Hur går det undersökta företaget tillväga för att värdera sitt varulager? Har det undersökta företaget svårigheter med att värdera varulagret, i så fall vilka? Kan det undersökta företagets värdering av varulagret förbättras?</p><p><strong>Syfte:</strong> Syftet med kandidatuppsatsen är att beskriva och analysera varulagervärdering i ett tillverkande företag. Uppsatsen syftar till att undersöka om det uppstår svårigheter vid värdering av varulagret i det undersökta företaget och vilka dessa är. Den syftar även till att undersöka om företagets varulagervärdering kan förbättras.</p><p><strong>Metod:</strong> I uppsatsen har en kvalitativ metod valts. Referensramen är uppbyggd av vetenskaplig litteratur och artiklar. Empirin bygger på personliga intervjuer. Referensramen och empirin har ställts mot varandra i analysen för att slutsatser skulle kunna dras.</p><p><strong>Slutsats:</strong> Det undersökta företaget följer råden i BFNAR 2000:3 för värdering av varulagret även om inte huvudreglerna tillämpas. Företaget har vissa svårigheter med varulagervärderingen men dessa är inte betydande då värderingssystemet som helhet fungerar bra. De förbättringar företaget kan göra är att fastställa produkternas värde vid varje förädlingssteg, bli bättre på att följa upp förkalkyler med efterkalkyler, utbilda operatörerna för noggrannare rapportering samt förbättra värderingen vid månadsbokslut.</p> / <p><strong>The main issue: </strong>How does the investigated company value it’s inventory? Do the investigated company have difficulties in valuing the inventory, if so, which? Can the investigated company’s inventory valuation be improved?</p><p><strong>Purpose: </strong>The purpose of the bachelor thesis is to describe and analyze inventory valuation in a manufacturing company. The thesis aims to investigate if difficulties arise in the inventory valuation in the investigated company and which they are. It also aims to investigate if the company’s inventory valuation can be improved.</p><p><strong>Method: </strong>In the thesis a qualitative method has been chosen. The frame of reference is composed of scientific literature and articles. The empirics are composed of personal interviews. The frame of reference and the empirics have been put against each other in the analysis for conclusions to be drawn.</p><p><strong>Conclusions: </strong>The investigated company conforms to the principles in BFNAR 2000:3 for the valuation of the inventory even if it doesn’t conform to the main principles. The company has some difficulties with the inventory valuation but these are not significant as the valuation system as a whole functions well. The improvements the company can make are to determine the value of the products at each processing step, become better at following up the pre calculations with after calculations, educate the operators for more accurate reporting and improve the valuation of monthly financial statements.</p>

Problemformuleringar: Hur går det undersökta företaget tillväga för att värdera sitt varulager? Har det undersökta företaget svårigheter med att värdera varulagret, i så fall vilka? Kan det undersökta företagets värdering av varulagret förbättras? Syfte: Syftet med kandidatuppsatsen är att beskriva och analysera varulagervärdering i ett tillverkande företag. Uppsatsen syftar till att undersöka om det uppstår svårigheter vid värdering av varulagret i det undersökta företaget och vilka dessa är. Den syftar även till att undersöka om företagets varulagervärdering kan förbättras. Metod: I uppsatsen har en kvalitativ metod valts. Referensramen är uppbyggd av vetenskaplig litteratur och artiklar. Empirin bygger på personliga intervjuer. Referensramen och empirin har ställts mot varandra i analysen för att slutsatser skulle kunna dras. Slutsats: Det undersökta företaget följer råden i BFNAR 2000:3 för värdering av varulagret även om inte huvudreglerna tillämpas. Företaget har vissa svårigheter med varulagervärderingen men dessa är inte betydande då värderingssystemet som helhet fungerar bra. De förbättringar företaget kan göra är att fastställa produkternas värde vid varje förädlingssteg, bli bättre på att följa upp förkalkyler med efterkalkyler, utbilda operatörerna för noggrannare rapportering samt förbättra värderingen vid månadsbokslut. / The main issue: How does the investigated company value it’s inventory? Do the investigated company have difficulties in valuing the inventory, if so, which? Can the investigated company’s inventory valuation be improved? Purpose: The purpose of the bachelor thesis is to describe and analyze inventory valuation in a manufacturing company. The thesis aims to investigate if difficulties arise in the inventory valuation in the investigated company and which they are. It also aims to investigate if the company’s inventory valuation can be improved. Method: In the thesis a qualitative method has been chosen. The frame of reference is composed of scientific literature and articles. The empirics are composed of personal interviews. The frame of reference and the empirics have been put against each other in the analysis for conclusions to be drawn. Conclusions: The investigated company conforms to the principles in BFNAR 2000:3 for the valuation of the inventory even if it doesn’t conform to the main principles. The company has some difficulties with the inventory valuation but these are not significant as the valuation system as a whole functions well. The improvements the company can make are to determine the value of the products at each processing step, become better at following up the pre calculations with after calculations, educate the operators for more accurate reporting and improve the valuation of monthly financial statements.

I ett litet företag finns en risk att ledningen fokuserar så mycket på kärnverksamheten att övriga administrativa verksamheter åsidosätts. Exempelvis finns det risk att företaget inte har full kontroll på sina lager. Syftet med den här uppsatsen är att beskriva och analysera värderingen och styrningen av lagret hos ett litet handelsföretag med butik och i förekommande fall ge förbättringsförslag. Vi har dels studerat lagar och rekommendationer avseende hantering av lager samt litteratur inom området lagerstyrning i handelsföretag. Dessutom har vi intervjuat företrädare för ett typiskt litet handelsföretag. Det undersökta företaget uppfyller gällande lagar och rekommendationer, men inte så mycket mer. Vidare använder sig företaget mestadels av känsla och erfarenhet i sin lagerstyrning. Förtaget använder alltså inte formella analyser och metoder i någon större utsträckning, om ens någon. Vi har några förslag på förbättringar i detta avseende. / In a small company there is a risk that the management focuses so much on the core business that other administrative tasks are ignored. For example, there is a risk that the company does not control its inventories efficiently. The purpose of this thesis is to describe and analyze the valuing and control of the inventory in a small retail company with a store and, where appropriate, give suggestions for improvement. We have studied laws and recommendations regarding inventory valuation and other literature regarding inventory control in retail companies. Additionally we have interviewed representatives for a typical small retail company. The investigated company does comply with applicable laws and recommendations, but not much more. Furthermore, the company uses mostly feel and experience in its inventory control. The company does not use formal inventory control in any great extent, if any. We have some suggestions for improvements in this regard.

The thesis deals with the issue of inventories in companies. The thesis describes inventories according to the current and amended legislation in the Czech Republic. Subsequently, the thesis describes accounting operations, activities and processes associated with inventories in practice. Focusing on two companies characterized by their cooperation, but different in their activities, the thesis analyzes the chosen fields of inventories and related activities, including the specifics resulting from mutual cooperation.

Diploma thesis focuses on problematic of inventories from two points of views. First one is focused on Czech Accounting Legislation (CAL) whereas second one is focused on International Financial Accounting Standards (IFRS). Diploma thesis consists of many examples to acquaint readers with given topic. Attention is given to definitions, characteristics of inventories, inventories under CAL and IFRS, evidence of inventories and techniques of inventories valuation.

The thesis deals with the issue of stocks in companies engaged in commercial activities. The aim of the thesis is in the first instance describe theoretically the reserves from the perspective of Czech accounting standards and International accounting standards and their accounting treatment under Czech law. Next, the thesis describe the activities associated with supplies in practice. In the second part, all these activities are evaluated on a concrete example of a company that deals with the distribution of semiconductors, passive and electromechanical components and integrated techniques. With regards to the activity of the analyze company, the thesis presents selected specifics that are associated with areas of inventory.

文獻顯示存貨對於銷售和盈餘具有預測能力（Bernard and Noel 1991）。本文進一步探討比較後進先出法和國際會計準則允許之存貨計價方法所揭露之存貨，對於銷售和盈餘之預測能力。2003年發布之國際會計準則第二號公報「存貨」，禁止公司採用後進先出法衡量存貨，本研究擬觀察後進先出法和非後進先出法存貨對公司銷售與盈餘的預測能力是否有所差異。 本研究選取採用後進先出法並且揭露後進先出存貨準備之公司做為樣本，計算出樣本公司在國際會計準則規定下應有之存貨水準，測試與比較後進先出法之存貨與依國際會計準則揭露之存貨，孰者對銷售與盈餘之預測更具攸關性。實證結果顯示，後進先出存貨與國際會計準則存貨代理變數之實證結果並不顯著，顯示存貨在銷售與盈餘之預測迴歸模型中為一雜訊，存貨對銷售和盈餘之預測並不具有增額資訊，也說明存貨生產平穩理論與避免缺貨理論無法解釋存貨對銷售和盈餘預測之關聯性，因此無法判斷採用何種存貨計價方法所揭露之存貨，對銷售與盈餘較具預測能力。 / In economic literature, production smoothing model and stockout model address the predictability of inventory disclosure on sales and earnings. Based on these models, Bernard and Noel (1991) show that inventory disclosure predicts sales and earnings. This study further investigates and compares the predictability of the sales and earnings by inventory reported under last in, last out (LIFO) and that under International Accounting Standard 2 (IAS 2). Thus this study compares the predicting ability of inventory on sales and earnings under IFRS and non-IFRS. This study selects the companies adopting LIFO and disclosing LIFO reserve, calculates the inventory reported under IFRS, and determines the inventory’s ability to predict future sales and earnings under different inventory valuation methods. The empirical results show that the coefficients for the unexpected inventories under LIFO and IFRS are both statistically insignificant, suggesting that the unexpected inventories are merely noises in the models, and that the effects of production smoothing model and stockout model are not prevailed. Thus, it is difficult to determine which inventory valuation method can generate the inventory that leads to better sales and earnings prediction.