Valuation of inventories in retail: How to manage risks and optimize your balance sheet

The balance sheets of trading and service companies differ considerably. This is mainly due to the inventories that trading companies hold in their salesrooms and warehouses. Goods in transit (“floating goods”) must also be included in the annual financial statements.

In practice, the valuation of inventories proves to be extremely complex. Below you can see the most important valuation categories that have a direct influence on the valuation.

Categories at a glance: How to value your inventories

Limited shelf life
Whether food or products from perfumery and cosmetics: many goods and products only have a limited shelf life. At the time of accounting, they must therefore be written down to their expected selling price. The loss in value is recognized as a write-down on inventories in the income statement.

Fluctuating prices
Fluctuating energy prices are a recurring topic of discussion. Food prices also fluctuate, depending on weather conditions, harvest volumes and demand.

In accordance with the lower of cost or market principle, goods with strongly fluctuating purchase prices must be recognized at their lowest possible value on the balance sheet date. There is a choice between the purchase price and the current market price. Depending on the price development, there is a devaluation and value adjustment. This is recognized as an expense in the income statement.

Degree of realizability
Whether household goods, books or clothing: Products can be damaged during transportation, storage or presentation. This reduces their value.

In retail, goods are generally categorized into A, B and C goods:

• A goods are fully functional and marketable. They are recognized at full value.
• B goods have slight defects. However, they are still marketable and are recognized at a discount corresponding to the reduction in value.
• C goods have significant defects or damage. They can only be sold at a discount or as spare parts. They are recognized at their residual value.

Storage period
“Slow-moving items” are products that remain in stock for a long time. They represent a risk for retailers, as they tie up capital and run the risk of being damaged. In this case, they can no longer be sold at their full value.

On the other hand, there are “fast-moving items” that only need to be stored for a short time thanks to high demand. The risk of loss of value is low. They represent a low financial risk.

Sales risk
Specialty items have a high sales risk. Demand fluctuates, which is why they are difficult to sell.

Ventilators, for example, were in high demand during the pandemic. In the meantime, many facilities have covered their needs for years. Goods like these may have to be devalued.

In contrast, standard items have a low sales risk. They are easy to procure and sell and can therefore be recognized at their full value.

Additional categories:

Seasonal items
Christmas, Easter or carnival items are valued at their market value on the balance sheet date. If they are difficult to sell after the season, they must be written down.

Trend articles
They are particularly well known in the fashion industry: trend items that are often only on sale for a short period of time. A hype is followed by a sharp drop in demand.

As long as the trend continues, trend items can be recognized at their full value. If the trend subsides, they must be devalued.

As you can see: According to the lower of cost or market principle, goods and products must be recognized at the lower fair value. This initially simple-sounding rule proves to be complicated and extremely complex in practice.

Warehouse valuation with “Valuation 365”

Our “Valuation 365” app for Microsoft Dynamics Business Central makes life much easier for retail companies. The advantages:

• Automation of the valuation
• Reliable compliance with the lowest value principle
• Flexible adaptation to individual needs
• Improved transparency
• Increased accuracy
• Reduced risk of errors
• Improved decision making

Visit one of our upcoming webcasts and see for yourself how “Valuation 365” can simplify, accelerate and refine the valuation process in your company. To the information and registration.