Stock Analysis, Classification and Valuation

Stock analysis: The process of understanding the stock/product mix combined with the knowledge of the demand for stock/product. It is the technique to determine the optimum level of inventory for a firm

It helps an organisation in:

  • Establishing a proper warehouse layout
  • Reducing lead time in acquiring sellable items
  • Implementation of proper authorization
  • Proper item classification for better cost management
  • Proper management of dormant inventory items
  • Improved utilization of the company‘s capital
  • Better and positive cash flow
  • Future identification of possible opportunities or losses

Stock Classification: Inventory classification can help a company control its inventory by reducing the amount of stock they have on hand and by increasing the inventory turnover ratio. Both of which make a company‘s distribution network more efficient and lower its overall cost. Classifying inventory will allow the Supply Manager to set up a review schedule to check inventory levels to establish inventory control.

Stock valuation: It allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.

Methods of stock valuation:

  • Moving Average Cost
    Moving average cost is a common way to track the value of inventory. Inventory cost are essentially re-calculated every time you make an inventory purchase. To accomplish this, you would take the total cost of the items purchased divided by the number of items in stock. You would then use this number as your cost of ending inventory and the cost of goods sold for your accounting purposes. Moving average cost can only be used with a perpetual inventory tracking system that keeps upto-date records of inventory balances. This is easily accomplished by using inventory software like Inflow Inventory.
  • Manual or Standard Cost
    You can also keep track of your inventory costs by manually assigning the cost to your items; however, this is probably the most tedious way and not necessarily the most accurate, especially if your vendor prices change on a regular basis.
  • FIFO Costing
    FIFO costing stands for First-In, First-Out. This method of costing essentially means that the oldest inventory items are recorded as a sold first. Your oldest purchasing costs will be used to calculate your profit.
  • LIFO Costing
    LIFO stands for Last-In, First-Out. This inventory valuation method means you use the cost of your most recent inventory purchases to calculate your profit.
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