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Selection of inventory valuation method

First, the significance of reasonable inventory valuation

Inventory is a very important asset of an enterprise, accounting for a large proportion. The reasonable choice of inventory valuation method has an important impact on the operating results of enterprises. The choice of inventory valuation method is an important content of formulating enterprise accounting policy. Choosing different inventory valuation methods will lead to different reported profits and inventory valuation, which will have different effects on the tax burden and cash flow of enterprises, and will also have different effects on the operating results of enterprises' financial status.

Inventory accounts for a large proportion of the total current assets of most enterprises, and it is constantly being bought, consumed and sold, so it is very important to confirm the inventory quantity and its value (that is, inventory valuation). The Measures for Pre-tax Deduction of Enterprise Income Tax stipulates that once the taxpayer's cost calculation method, indirect cost allocation method and inventory valuation method are determined, they shall not be changed at will. If it is really necessary to change, it shall be reported to the competent tax authorities for approval before the start of the next tax year. Otherwise, the tax authorities have the right to adjust their taxable income. However, many enterprises do not fully understand this problem, or are influenced by some factors, and make unrealistic choices in the method of enterprise inventory valuation, thus adversely affecting the inventory management, financial status and operating results of enterprises.

Second, the criteria for selecting inventory valuation methods

The difference of inventory valuation methods is caused by the inconsistency between inventory cost circulation and physical circulation and the difference of actual cost of homogeneous inventory. Inventory circulation includes two aspects: physical circulation and cost circulation. Under normal circumstances, the cost cycle of purchased or self-made inventory is inconsistent with the cost cycle of sold goods, thus resulting in the allocation of inventory costs between inventory and sales. In order to correctly reflect the inventory flow, the following standards should be followed when determining the pricing method of deposits and loans:

(a) Based on historical costs

One of the main components of current assets of enterprises is inventory, which is priced at historical cost. In fact, inventory is likely to be sold at a price much higher than the cost, so the cash amount obtained from selling inventory is often greater than the amount used in calculating the current ratio. At the same time, with the passage of time and the persistence of inflation, the historical cost and replacement cost of inventory will inevitably deviate.

(two) adhere to the principle of objectivity, truthfully reflect the cost of sales and ending inventory value;

Because the physical management of inventory is generally "first in, first out", if the LIFO method is used for accounting, the result may not be consistent with the actual situation. When the first-in first-out method is adopted, the ending inventory is calculated according to the late purchase price, which is close to the replacement cost on the table preparation date, making the asset evaluation more reasonable. When the LIFO method is adopted, the current inventory is measured at an earlier unit price, which is far from the replacement cost on the table preparation date. The greater the price change, the more obvious this phenomenon is. In the period of inflation, the ending inventory produced by LIFO method is very low, which makes asset evaluation meaningless. Therefore, financial analysis has also been greatly affected, with low operating costs, low liquidity ratio and low return on investment.

(3) Adhere to the principle of prudence and ensure that business owners and potential investors avoid risks as much as possible when making decisions, so as to maximize risk and return.

In the traditional theory, LIFO method is considered as a more scientific and effective inventory valuation method, which can reasonably measure the cost of commodity sales and reduce the profit of inventory, thus fairly representing the financial situation and operating results of enterprises. But strictly speaking, LIFO only embodies the principle of prudence with conditions, steps and restrictions, not the principle of prudence in the pure sense. This is mainly because there is a following relationship between the ending inventory of one accounting period and the beginning inventory of another accounting period in terms of quality and quantity, that is, the ending inventory of one accounting period is equal to the beginning inventory of the next accounting period in terms of quantity and amount. Therefore, the LIFO method reduces the ending inventory compared with the LIFO method, and correspondingly reduces the opening inventory of the next accounting period. Because of the internal relationship between the ending inventory and the beginning inventory, the LIFO method reduces the ending inventory value in one accounting period and the inventory profit and tax, but correspondingly increases the ending inventory value and the inventory profit and tax in the next accounting period. Based on the assumption that enterprises continue to engage in production and operation according to the actual situation and established goals, from the perspective of the whole life cycle of enterprises, LIFO method can not effectively eliminate the inventory profits brought about by price fluctuations. Therefore, LIFO is not a real cautious method, but a temporary method that embodies the principles of conditional, gradual and limited caution. At the same time, the choice of inventory valuation method is also affected by the objective economic environment. When choosing the inventory valuation method, we must make comprehensive consideration, overall arrangement and scientific decision.

Third, the analysis of inventory accounting valuation methods

(A) the valuation method of inventory accounting

Generally speaking, the valuation methods of inventory accounting include six categories: actual cost, planned cost, purchase price or selling price of goods, whichever is lower, valuation method, replacement cost method and net realizable value method. The following detailed analysis of six categories.

1. Valuation at actual cost.

When the inventory accounting is based on the actual cost, the income and delivery of inventory are based on the actual cost, and the general ledger and subsidiary ledger of inventory are set and registered according to the actual cost. Calculation method of actual cost of issued inventory based on actual cost;

(1) individual valuation method

Individual valuation method, also known as batch actual method, specific identification method and specific identification method. This method is based on the assumption that the cost flow of inventory is consistent with the physical flow. According to all kinds of inventories, the purchase batches or production batches to which the batch issued inventory and ending inventory belong are determined one by one, and the unit cost determined during purchase or production is used as the method to calculate the cost of each batch issued inventory and ending inventory. It is reasonable and accurate to calculate the cost of issued inventory and ending inventory by this method, but the premise of this method is that it is necessary to specifically identify the batches of issued inventory and balance inventory to determine their income batches, which is heavy and difficult in practical operation. Moreover, this method can easily be used as a means to adjust profits. Because if the business is not good and the estimated profit is not high, managers can sell low-priced goods at high prices to improve profits, or vice versa. Generally, the inventory that cannot be used interchangeably within an enterprise, or the inventory that is specially purchased or manufactured for a specific project and stored separately, as well as the precious materials that are purchased in small quantities, easy to identify and have high unit value, generally adopt the individual pricing method. This method is applicable to both the periodic inventory system and perpetual inventory system.

(2) Weighted average method

The weighted average method, also known as the one-time weighted average method at the end of the month, refers to calculating the weighted average unit cost of inventory with the inventory quantity at the beginning of the month and the inventory quantity purchased this month as weights, and then determining the inventory delivery cost and the inventory cost at the end of the period. This method only needs to be calculated once at the end of the month, which is more convenient. However, the cost of inventory can only be determined at the end of the period, and the balance of inventory cannot be provided from the books at any time, which is not conducive to strengthening the daily management of inventory. At the same time, whether it is rising or falling, there is a certain gap between the calculated inventory cost and the current cost, and this method can only be used under the regular inventory system.

(3) LIFO method

LIFO assumes that the cost flow is opposite to LIFO. LIFO (Last-in-First-out) method is a method to price the issued inventory according to the latest unit price, which is based on the assumption that the purchased inventory will be issued first. The cost of issuing inventory calculated by LIFO method is close to the recent market price, so that the current cost matches the current income, thus reasonably confirming the current income. In the case of rising prices, it can increase the cost of materials issued in the current period, reduce profits, delay the payment of income tax by enterprises, and reduce the adverse impact of inflation on enterprises. At the same time, because the final balance cost of materials is determined according to the previous price, it also reduces the capital occupation of inventory materials, which can increase the stamina of enterprises and improve their ability to resist risks. However, this method may lead to inflated or inflated costs. In the periodic inventory system and perpetual inventory system, the cost of issuing inventory calculated by this method is not equal. However, the current sales revenue can match the current sales cost and reflect the operating performance of the current operators. Although the LIFO method has its shortcomings, it is still an ideal method under the current national conditions of our country. This method is generally suitable for expensive small inventory.

2. Pricing according to the planned cost

When the inventory accounting is priced according to the planned cost, the general ledger and subsidiary ledger of the inventory are registered according to the planned cost, and the difference between the actual cost and the planned cost is separately accounted for as the cost difference of the inventory. The planned cost of the issued inventory should be adjusted to the actual cost, and the planned cost of the inventory at the end of the period should be adjusted to the actual cost and listed on the balance sheet. Planned cost accounting method is generally suitable for enterprises with various kinds of inventory and frequent receiving and sending. Such as various raw materials and low-value consumables of large and medium-sized enterprises. If there are many varieties of self-made semi-finished products and finished products, or the planned cost and cost difference need to be calculated separately in management, planned cost accounting can also be used. Valuation according to the planned cost method is divided into two parts:

(1) Planning cost formulation

According to the planned cost, it is the premise of inventory accounting to correctly formulate the planned cost of all kinds of inventory. The planned cost of inventory should be formulated according to the composition of the actual cost of inventory, taking into account factors such as suppliers and modes of transportation, so as to be as close as possible to the actual cost and keep it relatively stable. Unless there are special circumstances, it should be adjusted at any time, and generally it will not change within one year.

(2) Calculation of inventory cost variance

Inventory cost difference refers to the difference between actual cost and planned cost, which is generally divided into two situations: overspending difference and saving difference. Overexpenditure difference is the difference between actual cost and planned cost, or unfavorable difference, and saving difference is the difference between actual cost and planned cost, or favorable difference. In practical work, we should first calculate the inventory cost variance rate, then calculate the cost variance that should be borne by the issued inventory, and adjust the planned cost of the issued inventory to the actual cost.

3. Accounting according to the purchase price or selling price of commodities.

(1) Commodity circulation enterprises engaged in commodity wholesale can calculate according to the purchase price, and the purchased goods are regarded as the actual cost of the inventory goods according to the original purchase price of the goods. The actual cost of selling goods can be calculated by FIFO method, weighted average method, LIFO method, individual valuation method, gross profit margin method, etc., but once one of these methods is adopted first, it cannot be changed at will.

(2) Commodity circulation enterprises engaged in the retail of commodities generally use the sales price for accounting, and the purchased commodities increase their inventory according to the sales price of commodities, and the difference between the sales price and the purchase price is accounted for as the difference between the purchase and sale of commodities. The actual cost of selling goods can be carried forward according to the usual selling price of goods. At the end of the month, the difference of commodity cost should be allocated according to the proportion of storage and sales of commodities, and the selling price of commodities sold this month should be adjusted to the actual cost.

4. The method of lower cost or market price.

This method refers to the valuation of inventory at the end of the period. When the cost is lower than the market price, it is calculated according to the original cost, and when the inventory cost is higher than the market price, the inventory cost is calculated according to the market price instead. The market price mentioned here refers to the replacement cost of inventory. The cost mentioned here refers to the original cost of inventory. Therefore, the method of lower cost or market price can also be called replacement cost method and original cost method. When this method is used to calculate the inventory value, the possible losses caused by the decrease of replacement cost or reproduction cost should be recognized in the current period, which is contrary to the original cost principle, but in line with the principle of conservatism. Considering the possible losses in the future, under the condition of unstable market price, the ending inventory cost calculated by the method of lower cost or market price is not lower than the actual cost but close to the replacement price. When these stocks are sold in the future, they will not be greatly affected by price changes, so they can maintain their own.

Normal profit rate during this period. There are three ways to apply the lower cost or market price method at work:

(1) Item-by-item comparison method: compare the cost and market price of each inventory item, and choose the lower one as the item.

Quantity of goods.

(2) Classification comparison method: that is, compare the cost and market price of each kind of inventory, and take the lower as the amount of this kind of inventory.

(3) Total comparison method: that is, compare the total cost and total market price of all inventories, and take the lower as the amount of all inventories.

Once one of the above three methods is adopted, it shall not be changed at will according to the principle of consistency. When comparing the market price with the cost, the market price adopted is the replacement cost, which shall not exceed the net realizable value after deducting the reasonable estimated purchase and disposal expenses from the sales price, nor shall it be lower than the net realizable value MINUS the estimated normal gross profit.

5. Valuation method

Companies need to calculate the inventory cost at the end of each month when preparing monthly financial statements. When the periodic inventory system is adopted, it is counted once a month, which is not at public expense and costs more money, so it is generally counted at the end of each year. In this way, when preparing monthly financial statements, it is necessary to evaluate the ending inventory cost. There are usually two valuation methods:

(1) gross margin method

This method uses gross profit margin to estimate the cost of goods sold in the current period and calculate the estimated cost of ending inventory. When using the gross profit margin method, the accuracy of gross profit margin estimation directly affects the accuracy of ending inventory cost. In order to prevent improper use of gross profit margin in calculation, the selected gross profit margin must be representative of the business activities engaged in. If the gross profit margin of the company's inventory at the time of sales is quite different, all kinds of inventory with similar gross profit margin should be classified, and the appropriate gross profit margin should be adopted in the calculation, and the estimated cost at the end of each kind of inventory should be calculated, and then the total should be calculated.

(2) Retail price method

This law means that the retail price of each commodity is marked, and the purchase business is registered separately according to the cost and retail price. After calculating the ending inventory according to the retail price, subtract the amount of goods sold from the total amount of goods available for sale calculated according to the retail price, then calculate the ratio of the two according to the cost and retail price of the inventory, and multiply the ratio by the ending inventory calculated according to the retail price to get the estimated cost of the ending inventory.

6. Replacement cost method and net realizable value method

(1) replacement cost method

This law refers to the cost of repurchasing existing materials, commodities and other inventories at the current market price. According to the replacement cost method to determine the value of inventory, due to market fluctuations, the value of inventory will also fluctuate, so the company's profit and loss will be underestimated or inflated, and the principle of matching income with expenses cannot be realized. However, from the company's balance sheet, the replacement cost can reflect the value of inventory, and current assets such as inventory can be used to correctly measure the company's solvency.

(2) net realizable value method

Net realizable value, also known as net realizable value, refers to the normal selling price of inventory after deducting reasonable expected processing and disposal costs. This method is generally applicable to the valuation of inferior, obsolete and cold-backed goods or products when determining the inventory value.

(B) Comprehensive analysis of common inventory valuation methods

1. From the point of view of value

When the first-in first-out method is adopted, the ending inventory is calculated according to the late purchase price, which is close to the replacement cost on the table preparation date, making the asset evaluation more reasonable. When the LIFO method is adopted, the current inventory is measured at an earlier unit price, which is far from the replacement cost on the table preparation date. The greater the price change, the more obvious this phenomenon is. In the period of inflation, the ending inventory produced by LIFO method is very low, which makes asset evaluation meaningless. Therefore, financial analysis has also been greatly affected, with low operating costs, low liquidity ratio and low return on investment. From the point of view of profit determination, LIFO method can get more meaningful profit data by comparing the recent purchase cost with the recent operating income, so as to reasonably explain, evaluate and predict the operating results of enterprises. If all the profits obtained are distributed in the form of income tax and dividends, it will not affect the continuous operation of the enterprise according to its original scale too much. On the other hand, if the first-in first-out method is adopted, the gross profit of the previous inventory cost is virtual compared with the current operating income. If the calculated gross profit is completely divided in the form of income tax and dividends. The cost of recovery is low, so it is difficult to replace the same amount of inventory at the current price level, which makes it impossible for enterprises to continue to operate according to the original scale.

2. From the perspective of tax payment and cash flow

LIFO method can depress the inventory cost at the end of the period, increase the cost of goods sold and reduce the taxable profit in the current period, thus reducing the cash flow generated by taxable income, and making the net cash inflow of enterprises more than FIFO method and average method. However, the effect of LIFO method in reducing income tax payable and increasing net cash inflow is not absolute. In the long run, the total inventory cost of an enterprise, whenever it is formed, will eventually be converted into the cost of goods sold under normal circumstances. If all the inventory has been sold, its cost will be converted into the cost of goods sold. Other things being equal, no matter which inventory valuation method is adopted, the total cost of goods sold, the total profit before tax, the total income tax, the total profit after tax and the total cash inflow in several accounting periods are the same.

3. From the perspective of managers' performance evaluation

Whether a certain inventory valuation method is appropriate or not is also related to the performance evaluation method and reward mechanism of enterprise managers. Many enterprises evaluate the performance of enterprise managers according to the level of profits, and reward managers according to the evaluation results. At this time, managers are often willing to adopt the first-in first-out method, because doing so will overestimate the profit level during their term of office and thus obtain more direct benefits.

Fourthly, the selection and improvement of inventory valuation methods.

(A) the choice of inventory valuation methods

1. Considering the characteristics of inventory and its management requirements,

The first factor that needs to be considered when choosing inventory valuation method is the characteristics of inventory and its management requirements. There is no doubt that individual valuation methods should be adopted for inventory items that cannot be replaced with each other and inventory produced and stored for specific projects. If there are a large number of replaceable inventory items, it will be difficult to adopt a separate pricing method. At this time, it is necessary to choose between FIFO, weighted average, moving average and LIFO. In most cases, the physical management of inventory may be "first in first out", so the "first in first out" method is more in line with the actual situation of inventory.

2. Consider the impact of inventory valuation methods on the company's finances.

The second factor to consider when choosing inventory valuation method is the influence of inventory valuation method on enterprise finance. Different inventory valuation methods will directly affect the determination of ending inventory value and the calculation of sales cost, and then affect the profit, tax burden, cash flow and financial ratio of enterprises. Generally speaking, in the case of rising prices, adopting LIFO method will lead to the decrease of ending inventory, gross sales profit, income tax and net income; However, the result of FIFO method is just the opposite. If the price continues to fall, the opposite conclusion will be drawn. No matter how the price changes, the results of accounting by average method (including weighted average method and moving average method) are always between FIFO method and LIFO method. However, the general financial impact of the above inventory valuation methods on enterprises will be different due to their own characteristics and different periods. For example, if the turnover is fast and the inventory backlog is small, the advantages of LIFO will not be brought into play.

3. From the impact of inventory valuation methods on enterprise management and performance evaluation.

The third factor to consider when choosing inventory valuation method is the influence of inventory valuation method on enterprise management and performance evaluation. Because the physical management of inventory is generally "first in, first out", if the LIFO method is used for accounting, the result may not be consistent with the actual situation. Moreover, LIFO method can reduce income tax, but at the same time it will lead to a decrease in net income, which will affect the business performance of enterprise managers and various rewards and remuneration based on net income. Therefore, from the perspective of internal management and performance evaluation, it is more reasonable to adopt FIFO method than LIFO method. In addition, when comparing the operating performance of different enterprises, the different inventory valuation methods will also affect the correctness of performance evaluation.

(B) the improvement of inventory valuation

The selection of inventory valuation method needs to consider the above factors, and it is difficult to take into account all the requirements by using any method. Regardless of individual pricing methods, FIFO method can better meet the requirements of inventory management, inventory pricing and performance evaluation, but it will lead to higher income tax expenditure when prices continue to rise. Last in first out method. Comparison FIFO

The situation is just the opposite. The weighted average method is between the first-in first-out method and the last-in first-out method except that the accounting workload is relatively small. The moving average method is basically the same as the weighted average method, but the accounting workload is larger than the weighted average method. Because modern accounting has widely used computers for accounting processing, accounting workload is no longer an important factor restricting the choice of inventory valuation methods. Therefore, the range of inventory valuation methods can be reduced to FIFO and LIFO.

The contradiction between FIFO and LIFO is difficult to reconcile. If we constantly switch between the two methods according to the objective situation and the change of interest balance, it will inevitably conflict with the requirements of the principle of consistency, leaving people with the suspicion of "whitewashing" and "adjusting", and it is difficult to compare the performance with other enterprises that adopt another method.

The only way to solve the problem is to report the accounting information obtained by two inventory valuation methods at the same time. This also means that the tax law should allow the inventory valuation method used in enterprise accounting to be inconsistent with the inventory valuation method that should be adopted when calculating the tax payable; Otherwise, it will conflict with the tax law. At present, China's tax law does not clearly stipulate that enterprises must adopt the same inventory valuation method for accounting and taxation, so the above practice is also feasible. Specifically, FIFO method is suitable for physical inventory management, inventory sales price determination, inventory valuation and performance evaluation, and these management and decision-making are important parts of daily work, and income tax is only paid regularly, so FIFO method can be used to adjust the daily accounting of inventory, and LIFO method can be used at the end of the period to give full play to the advantages of LIFO method in reducing income tax expenditure. The financial report also introduces the accounting results of these two different inventory valuation methods.