Question

Explain the various methods employed by companies to manipulate the valuation of inventory. Where appropriate provide relevant examples.

Answer 1

The companies can use various methods to manipulate the valuation of inventory:

• The company can delay the write down of inventory : By postponing the write down of inventory, the inventory can be recorded at a higher valuation.
• A company can increase the value of an inventory by increasing the cost at which sales happen:

FOR EXAMPLE: I am currently having stock of 50 units of cakes, i feel that due to great demand for cakes, i can also sell cakes at an increase the price without losing on the demand.

So, if i had value my inventory at (50 * 500) = $25,000

I can now value my inventory at (50* $700 ) = $35,000

Due, to the higher costs per unit of inventory i can value my inventory at a higher amount.

• Companies can also increase, the inventory valuation by increasing the count of inventory. By reporting fake numbers, they can artificially increase the valuation of inventory.

For example: in the above problem, if we increase the number of units to 70 fro 50 we can increase our inventory valuations to $35,000 from $25,000.By reporting fake numbers, the company was successful in overstating inventory valuations.