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Stock Valuation and Audit

The method of valuing stock for balance sheet purpose is quite independent of the system of pricing for costing purposes. The valuation of stock in financial accounts is dome on the basis of the principle that it is imprudent to consider unrealized profits and ignore anticipated losses. Therefore, stock for balance sheet purposes is value at lower of the cost or market price. For calculating the cost price of stock of materials in hand, it is assumed that stock consists of most recent purchases.

Stock audit

Stock audit implies the physical verification of stock with the inventory records. Even in the cases where stores ledger is maintained in the perpetual inventory system, physical verification of stock is necessary which have become obsolete or useless.

Periodic stock verification

When the physical verification of stock is done periodically (e.g. half-yearly on annually), the system of verification is known as periodic stock verification system. The disadvantage of this method is that during the stock taking all transactions relating to materials “in or out of the store will have to be suspended.

Continuous stock verification

In this method continuous checking is done by taking different sections of the stores in rotation. This method is used is used by large concerns because they can afford to maintain a trained staff to take inventory continuously throughout the year. The system has the following advantages:

(a) It does not require a shutdown or business operation for stock taking.

(b) It serves as a moral check on the stores staff as they keep their records up-to-date at all times in anticipation of the unexpected arrival of the inventory staff.

(c) It estimates the possibility of delay in production on account of unexpected shortage in the stock of materials.

Following procedures may be followed in this connection:

1. The work of inventory taking should be taken during a period of slack business activity so that the production activities are disrupted for the minimum possible time.

2. The store-keeper should be asked to arrange the stock of materials and factory supplies in an orderly way. Obsolete and useless items should be separated from the normal stock for separate listing.

3. The inventory staff should be properly selected. They should be persons who are familiar with the various types of materials and capable of counting items quickly. They should be persons other than those who are working in the store.

4. Supervisors should be appointed from the foreman or the executive group. Each supervisor will have under him and a number of stock rooms. He will be assisted by counting and recording clerks. He will make groups of two – one to count and the other to record on the inventory tag or any other special sheet meant for this purpose. He will also appoint certain clerks as stock verifiers.