Keywords: inventory; pricing; enterprises; accounting; calculation; impact
Abstract: The differences in the methods of inventory pricing will have different effects on the financial status, enterprise value, taxation and cash flow, performance of management personnel, and profit and loss situation. The most suitable inventory pricing method for an enterprise is the best one, from which the enterprise can benefit. Therefore, it is necessary to consider all aspects comprehensively, learn from each other's strengths, and choose the most appropriate inventory pricing method for the enterprise.
For enterprises, the choice of which inventory pricing method is the best mainly depends on the characteristics of the inventory operated by the enterprise, the inventory system of material wealth, and the situation of price changes, etc. The inventory pricing method suitable for the enterprise is the best inventory pricing method, from which the enterprise can benefit. Therefore, it is necessary to consider all aspects comprehensively, learn from each other's strengths, and choose the most appropriate inventory pricing method.
According to international accounting conventions, combined with China's actual situation, common inventory pricing methods include: individual pricing method, first-in-first-out method, weighted average method, etc.
1 Analysis of Several Inventory Pricing Methods
(1) Individual Pricing Method. This method assumes that the cost flow of inventory is consistent with the physical flow. According to various inventories, individually identify the batches of issued inventory and end-of-period inventory belonging to the purchase batches and production batches, and calculate the cost of issued inventory and end-of-period inventory according to the unit cost determined at the time of purchase and production. Using this method to calculate the cost of issued inventory and end-of-period inventory is relatively reasonable and accurate, but the premise of this method is to specifically identify the batches of issued and remaining inventory to distinguish their income batches. The practical operation workload is heavy, difficult, and using this method is easily used as a means of profit adjustment. Because, if the operation is not good and the estimated profit is not high, the management personnel will sell low-cost goods at high prices to increase profits or reduce profits in the opposite way. In general, individual pricing methods are used in inventories that cannot be replaced in enterprises, or purchased for specific projects, or individually stored, as well as precious items with fewer purchase batches, easy identification, and higher unit values. And this method can be used under both the physical inventory system and the perpetual inventory system.
(2) Weighted Average Method. The weighted average method is also called the monthly weighted average method. It refers to using the quantity of initial inventory and the quantity of inventory purchased during the month as weights to determine the cost of inventory issued during the period and the cost of end-of-period inventory. This method only needs to be calculated once at the end of the month, which is relatively convenient. However, the inventory cost can only be determined at the end of the period, unable to provide the remaining amount of inventory from the account at any time, which is not conducive to strengthening the daily management of inventory. This method can only be used under the physical inventory system.
(3) First-In-First-Out Method. The first-in-first-out method is based on the assumption of physical flow that earlier purchased inventory is issued first to price the issued and remaining inventory. Using the first-in-first-out method, the inventory cost is determined according to the recent purchase, making the end-of-period inventory cost close to the current market value. Its advantage is that enterprises cannot arbitrarily select inventory pricing to adjust current profits. The disadvantage is that it is more complicated, especially for enterprises with frequent inflows and outflows. Moreover, under continuous price increases, using this method reduces the cost of issued inventory to the minimum, thus increasing the book profit falsely, leading to excessive capital distribution, which is not beneficial to the long-term operation of the enterprise. Enterprises whose business activities are significantly affected by inventory status or whose inventory is prone to spoilage generally use the first-in-first-out method. And this method calculates the cost of issued inventory equally under both the physical inventory system and the perpetual inventory system.
2 Impact of Inventory Pricing Methods on Enterprises
The difference in inventory pricing methods will have different impacts on the financial status and profit and loss situation of enterprises, mainly manifested in the following three aspects: ① Direct impact on the calculation of enterprise gains and losses. It is reflected in: If the end-of-period inventory valuation is too low, the current period's income may decrease accordingly; If the end-of-period inventory valuation is too high, the current period's income may increase accordingly; If the beginning-of-period inventory valuation is too low, the current period's income may increase accordingly; If the beginning-of-period inventory valuation is too high, the current period's income may decrease accordingly. ② Inventory valuation has a direct impact on the calculation of relevant items in the balance sheet, including total current assets, owner's equity, etc., which will differ due to different inventory valuations. ③ The choice of inventory calculation method has a certain impact on the calculation of income tax expenses. Because different pricing methods will affect the determination of the amount of current sales costs transferred, thus affecting the determination of the current profit amount. Inventory pricing methods arise due to price changes. If the inventory purchase price remains unchanged, different inventory pricing methods will lose their necessity. The evaluation of various inventory pricing methods should also take price changes as the background. Below, taking price increase as a condition, compare the impact of several inventory pricing methods.
2.1 Impact on Enterprise Value
Using the first-in-first-out method, the end-of-period inventory is calculated according to the early purchase price, which is close to the replacement cost on the statement preparation date, making asset valuation more reasonable. When using the last-in-first-out method, the end-of-period inventory is measured according to an earlier unit price, which has a large gap with the replacement cost on the statement preparation date. The larger the price change, the more obvious this phenomenon becomes. During inflation, the end-of-period inventory amount generated by the last-in-first-out method is low, making asset valuation meaningless. If the first-in-first-out method is used, comparing the earlier inventory cost with the actual operating revenue results in overestimated gross profit. If the gross profit amount calculated after deducting income tax and dividends, then the recovered cost is relatively low, making it difficult to replace the same amount of inventory under current cash prices, causing the enterprise to be unable to continue operating at the original scale.
2.2 Impact on Taxation and Cash Flow
The last-in-first-out method can lower the end-of-period inventory cost, increase the cost of goods sold, reduce taxable profits for the current period, thereby reducing the cash flow generated by taxable income, making the net cash inflow of the enterprise more than using the first-in-first-out method and the weighted average method. However, in the long term, the overall inventory cost of the enterprise, regardless of when formed, normally will eventually be converted into the cost of goods sold. If all inventories have been sold, their costs will be entirely converted into sales costs. Then, under other equal conditions, regardless of which pricing method is used, the total sales cost, pre-tax profit, total income tax, post-tax profit, and total cash inflow for several accounting periods are consistent.
2.3 Impact on Management Personnel Performance
Whether a particular inventory pricing method is appropriate is also related to the performance evaluation method and reward mechanism for enterprise management personnel. Many enterprises evaluate the performance of management personnel based on the level of profit and reward them according to the evaluation results. At this time, management personnel often prefer the first-in-first-out method because doing so will overestimate the profit level during their tenure, thereby gaining more immediate benefits.
3 Impact of New Accounting Standards on Inventory Pricing
3.1 Impact on Inventory Issuance Pricing Methods
Firstly, from a broad perspective, under the new standards, the "last-in-first-out method" for inventory has been abolished, stipulating that enterprises should use the first-in-first-out method, weighted average method, or individual pricing method to determine the actual cost of issued inventory. This will have a certain impact on companies with longer production cycles. Companies originally using the "last-in-first-out method", with more inventory and lower turnover rates, such as home appliance and metal processing listed companies, if inventory prices fall, their profits may drop significantly after the change in inventory accounting methods next year.