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Inventory valuation on the balance sheet

Majority of entrepreneurs will be part of enterprise sales or purchase process in some time. With the negotiation arises question - Is the inventory disclosed in the balance sheet in fair value?

When company purchase goods for sale they will be in the balance sheet in inventory in purchase or in the fair market value, depending on which is lower. The demand for the product will decrease when time passes and that will create the need to revaluate the stock value so it would be in fair market value. The inventory provision approach is different for each company depending on the sector and goods they are selling.

When company e.g. is selling nuts and bolts, which properties and quality does not change over time. Then the demand and fair value for this product will be constant and the revaluation might be very small. On the other hand companies operating in the fashion industry have to use other methods to valuate stock fair value. The demand for clothing and accessories is much less in the end of season than it was before that and in next year when the trends have changed the sales of those goods are very complicated. For that reason you will not be able to sell those products with the same price and provisions in the stock price have to be drastically different than the hardware seller and you have to reduce the value of the stock.

The changes in the consumer electronics are much faster with changing new products and rapid development of new products make the old ones morally amortised. In other words the quality of the product is declining but keeping it´s number values. The continuing development forces companies in this sector very aggressively revaluate it´s inventory. Depending on the sector the provision of stock could be 2-3% in a year and even 10-20% in a quarter. 

The accurate inventory valuation will enable companies to determine more precisely the stock which demand has fallen and increase the interest of consumers to purchase those goods. Stocks continuous provisions to fair market value will enable companies dilute the loss between different periods and change the inventory value to the current market value.

The company management is responsible for the stock revaluation so it would be in the fair value and they may include proper experts to assess the value. If there are no experts available in this sector the management has to evaluate it by themselves.

Aleksei Vorobjov, Investment Agency OÜ analyst