Valuation: How it affects financial reporting

Inventory valuation: effects on the balance sheet

The balance sheet profit is calculated from the difference between assets and liabilities. The items in the warehouse count as assets. If they are valued as high as legally possible, the total amount of assets and therefore the profit increases.

A high asset value is an indication of a financially stable situation in the company.

Example

A trading company estimates the value of its goods in stock at EUR 12,000. However, a precise valuation leads to a correction. The total value is EUR 14,000. The company’s financial situation is therefore better than expected.

Stock valuation: effects on the profit and loss account

Stock valuation also has an impact on the profit generated from sales. Low costs on the goods side cause profits to soar. Correspondingly, the profit decreases when costs are low.

Example

A trading company sells goods worth EUR 20,000. It estimates the cost of goods sold at EUR 10,000. The profit is EUR 10,000.

An audit reveals that the cost of goods sold is actually only EUR 8,000. The profit therefore increases to EUR 12,000.

Further effects of stock valuation

Stock valuation affects other key figures and information in financial reporting, including the following:

Creditworthiness

Before funds flow, investors check the financial situation of a company. Stable finances are a sign of security. An accurate inventory valuation can help improve creditworthiness and investor confidence.

Compliance with accounting standards

Inventory valuation must comply with applicable accounting standards. Traceable accuracy contributes to compliance.

Identification of obsolete stock

Obsolete stock must be written down or even written off completely. If they are included in the balance sheet at their full amount, the profit is unjustifiably high. Accurate stock valuation also helps to identify obsolete stock.

Example

A trading company has goods worth EUR 1,000 in stock. However, the goods have expired and can no longer be sold. The exact stock valuation means that the goods have to be written off as worthless. The company’s profit decreases. At the same time, the tax burden is reduced.

Software support for stock valuation

Software supports retail companies in ensuring accurate stock valuation at all times.

The functions that software can offer include the following:

• An optimal devaluation of assets in stock. This leads to a reduction in the tax burden.
• Valuation according to the strict lowest value principle with a view to the criteria of marketability, age structure, expiration date or range. Individual value adjustments are also possible.
• Efficient and robust valuation of stock values without Excel, and thus: Error avoidance and acceleration.
• Meaningful documentation on the valuation of stock levels over time.

Tips for carrying out an accurate stock valuation

For an accurate stock valuation, we recommend that you

Use valuation methods that are as consistent as possible

In order to be able to compare the results over the years, you should always use the same methods to value your inventories. If you deviate from your valuation method, you should have good reasons for doing so (see also: Changing the stock issue method).

Make sure your stock is up to date

Take all relevant factors, such as the purchase price or current market value, into account when valuing your stock.

Use software support

The average discounter already stocks 2,000 items or more (Statista). Without software support, it is practically impossible to keep track of the best-before date, for example. To optimize stock valuation and avoid errors, you should therefore use software.

Valuation with CKL-Software

Valuation plays a pivotal role in the financial reporting of retail companies, ensuring accurate representation of their assets and performance. In this regard, Valuation 365 emerges as a vital tool. Seamlessly integrated with Microsoft Dynamics 365 Business Central, this app facilitates the assessment of item movements, empowering businesses to derive pertinent values for their annual inventory.

Not only does Valuation 365 streamline the valuation process, but it also aids in aligning asset values with statutory regulations, ensuring compliance and accuracy in financial statements. By leveraging this app, retail companies can confidently prepare and assess their current assets, bolstering transparency and reliability in their financial reporting practices.

Curious about how Valuation 365 can enhance your financial reporting? Join us for an upcoming webcast where we delve into its features and benefits. Gain firsthand insights and explore the potential of Valuation 365 in optimizing your valuation processes. Secure your spot today by registering for our Valuation 365 Webcast and unlock the power of accurate valuation in retail financial reporting.