CHAPTER ONE

INTRODUCTION
1.0

BACKGROUND OF THE STUDY

Accounting policies are defined as the specific accounting bases selected and
consistently followed by an entity as being, in the opinion of the management,
appropriate to its circumstances and best suited to present fairly its results and
financial position. Statement of Accounting Standard (S.A.S) No. 1, issued by
the Nigerian Accounting Standards Board (N.A.S.B) defines accounting policies
as those bases, rules, principles, conventions and procedures adopted in
preparing and presenting financial statements(p. 25).
Accounting policies deal specifically with matters such as consolidation of
accounts, depreciation methods, goodwill, inventory pricing/valuation, and
research and development costs and they must be disclosed in the annual
financial statements. Accounting policies can be divided into three categories
namely: policies for revenue and expense recognition (profits and losses); assets,
investments, liabilities and provisions recording, under which inventory
valuation policies fall; and general financial reporting.
According to Ball (1972), changes in accounting policies are believed to deceive
the general public because of the effects they have on the reported incomes of
firms. He further observes that:
1

Apart from the real factors that influence firms incomes, there exist accounting factors that
permit firms to select from a variety of possible incomes to report (Ball, 1972, p. 1).

This means that if the various economic agents of society are uninformed of the
intricacies of accounting, part of which the choice of inventory valuation policy
falls under, they will not be able to distinguish between the real influences and
the accounting influences on the reported income of a firm.
Generally, inventory can be defined as the stock of items present with the
company which are to be used in the process of production, that is, a company's
merchandise, raw materials, and finished and unfinished products which have
not yet been sold. Inventory can therefore be seen as the items which are held
for sale in the ordinary course of business or which are in the process of
production for the purpose of sale, or which are to be used in the production of
goods or services which will be for sale. Inventories exist at all levels of
production, be it at the pre-production stage, work-in-progress stage and postproduction and for sale stage. Inventory valuation then, is a very important part
of cost accounting because at any given time, the company needs to know what
the value of the inventory is, to enable them to manage it better based on the
demand and supply conditions in the market.
The inventories of manufacturing companies include raw materials, goods in
process and finished goods. The purchase prices of goods and raw materials
vary. It has been argued that keeping up records of numerous purchases is

tedious and identifying the cost of specific product or goods sold is cumbersome
if not impossible for companies engaged in manufacturing (Ibarra, 2008).
Inventory valuation is an important part of the accounting function in any
manufacturing business. Apart from being a vital factor that affects the
companys cash flow, balance sheet and income statement, a big part of the
capital of the business is tied to or invested in its inventory. In fact, inventories
are perhaps the largest current asset of a business, and proper measurement of
them may be necessary to guarantee accurate financial statements. The cost of
the inventory at the end of an accounting period is crucial because of its effect
on the cost of goods sold and ultimately, on the computation of profits. The
lower the cost of ending inventory, the higher is the cost of goods sold, and vice
versa. Higher cost of goods sold will result in lower gross profit and vice versa.
Therefore, the choice of inventory costing method has a significant effect on
reported income.
For many companies, inventory represents a large portion of current assets and
becomes one of the most necessary parts. The accounting method that a
company decides to use to determine the costs of inventory can directly impact
the balance sheet, income statement and the statement of cash flow. It may
perhaps also affect the earnings per share and other financial indices, and the
investment plans. It is therefore important for all the corporations because while
the costs of inventories sold affect the income statement, the costs of the unsold
3

inventories affect the balance sheet and the value of the company at the end of
the financial year.
The casual reader will equally benefit by gaining fresh knowledge in this aspect
of accounting.
The kind of inventory valuation method chosen to determine the costs of ending
inventory has therefore been said to be one of the basic decisions all companies
engaged in the manufacturing and distribution of goods needs to make (Ibarra,
2008). Ideally, the method chosen should result in the best measure of a
company's income and financial condition.
1.1

STATEMENT OF THE PROBLEM

It is a pertinent question if one were to ask the rationale behind there being
different inventory valuation methods. This is because; at the outset it would
seem that the items would be purchased and then sold all at a good price. But
therein lays the problem. The prices of inventory items rarely stay steady over
the assessment period over which the bookkeeping for a company is done and
so, valuation becomes a little tricky. Suppose, an inventory item is purchased in
bulk at the start of the year, it costs the company N10 per piece and the company
purchases inventory at different times during the year, if the price of that
inventory item increases at 10per cent each month, there would be difficulty in
understanding the value of the inventory at the end of the financial year. Has the

N10 per piece been used or the N11 per piece? This would lead to a lot of
confusion, had it not been for the scientifically and logically devised inventory
valuation methods.
But how is the right inventory valuation method selected for any firm? Many
studies have been carried out based on this question, but a complete and
exhaustive answer may not be put forward yet. This is because an average firm
in each of the industries that make up the manufacturing sector of the economy
manages different types of inventory peculiar to their production process. Since
the values of the inventory at each stage of the production process (i.e. raw
material, work-in progress, finished goods) will be used either directly or
indirectly in the determination of the gross profit and by extension the reported
income of the firm, the managers are faced with the task of selecting the
inventory valuation policy that adequately fits the nature of the production
process and therefore precisely places value on each type of inventory at each
stage.
There are various types of inventory valuation methods, but statutory and
regulatory provisions have reduced the number of methods available for use by
any firm to a select few based on their impact not only on the firms in question,
but also on the stakeholders of the firms. The main thrust of this study is
therefore the process of selecting one of these valuation policies in view of their

respective impacts in the Nigerian setting and how managers are able to make a
decision on which policy to choose or follow.
1.2

PURPOSE OF THE STUDY

The primary objective of this study is to investigate the inventory valuation

policies employed by manufacturing companies in Lagos State. Therefore, this
study is designed to achieve the following objectives:
To highlight the various inventory valuation policies available to a
manufacturing company.
To establish a relationship between the inventory valuation policy used by a
manufacturing company and the reported income of that company;
To identify the factors a manager should consider when selecting an inventory
valuation policy;
1.3

SIGNIFICANCE OF THE STUDY

Generally accepted accounting principles allow alternative treatments of several

types of accounting events. Financial accounting policy-making bodies such as
the Nigerian Accounting Standards Board (N.A.S.B) and the Securities and
Exchange Commission rule on the admissibility of various accounting
procedures and on changes from one procedure to another. For this purpose,
they need information about the effect of accounting procedures and changes in
accounting procedures on the interest of various economic agents in society.
6

Admissibility of alternative procedures implies that corporate managers must

select one of the available procedures for their use. For making such selection,
managers need information about the relationship of accounting procedures with
corporate objectives.
In making their investment decisions, investors too need information not only
about the meaning of various accounting procedures but also about the
relationship of these procedures with stock prices. Likewise, tax authorities will
also need information about the effects that these accounting procedures have on
the reported incomes of these firms which have a direct bearing on the tax that
these firms are liable to.
Finally, shareholders of manufacturing firms also need this information as it
helps them understand the relationship of these accounting procedures with the
reported income and the share prices of the firms so that they can determine
whether a change in the reported income or share price of a firm is caused either
by a change in accounting procedure or by improved trading activities/a newly
discovered advantage or strength.

1.4

RESEARCH QUESTIONS

The study will attempt to provide answers to the following research questions:
What are the inventory valuation policies available to a manufacturing
company?
Do inventory valuation policies affect the reported incomes of manufacturing
companies?
What are the factors a manager should consider when selecting an inventory
valuation policy?

1.5

RESEARCH HYPOTHESES

The research hypotheses for this study are stated as follows:

HYPOTHESIS I
H0

The inventory policies available to a manufacturing company are the

First-In-First-Out, Weighted Average and the specific identification
methods.

H1

First-In-First-Out, Weighted Average and Specific Identification are not

the methods available to manufacturing companies.

HYPOTHESIS II
H0

There is no relationship between the inventory valuation policy used by a

manufacturing company and its reported income.

H1

The reported income of a manufacturing company affects its selection of

an inventory valuation policy.

HYPOTHESIS III
H0

There is no relationship between the inventory valuation policy used by a

manufacturing company and its tax liability.

H1

The tax liability of a manufacturing company affects its selection of an

inventory valuation policy.

1.6

RESEARCH METHODOLOGY

For the purpose of this study, the descriptive research design will be adopted.
This design focuses on the description of the state of affairs of a situation or
particular phenomenon as it exists at present. In the context of this study, the
phenomenon is the inventory valuation selection process.
The population, for the purpose of the study comprises of all manufacturing
firms listed in the Nigerian Stock Exchange which consists of firms from the
following industries: beverages, building materials, chemicals, food, healthcare,
manufacturing & industrial, and textiles, making a total of 72 companies. The
primary focus of the study is on companies that are situated within Lagos State,
thus limiting the number of eligible companies to 35 companies.
9

The sampling technique to be used will be the stratified sampling technique

where a stratified sample is obtained by independently selecting a separate
simple random sample from each population stratum. A population can be
divided into different groups based on some characteristics or variables, which,
in the context of this study, are the industries which these firms belong to. A
total of 18 companies will be selected as the sample size for the study.
The data collection instrument to be used for the study is the questionnaire,
which will be self-administered and collected directly. The questionnaire will
serve as the primary source of data for the study. The secondary sources of data
for this study consist of journals, articles published on the internet and
textbooks.
The respondents for this study are the financial managers/directors of each
company, as they have a knowledge of the accounting and financial policies of
the companies within which they serve. Therefore they will be able to provide
information that will be relevant to the study.
1.7

SCOPE AND LIMITATION OF THE STUDY

The limitations of the study are those characteristics of design or methodology

that set parameters on the application or interpretation of the results of the study;
that is, the constraints on generalizability and utility of findings that are the

10

result of the devices of design or method that establish internal and external
validity.
The purpose of this research is to investigate the inventory valuation policies
employed by manufacturing companies in Lagos State. The scope of the study
shall cover the process of selecting the inventory valuation policy used by
companies belonging to different industries, which are located within the state.
It shall also be concerned with the factors that come into play in the choice of
such inventory valuation policies and in changes of inventory valuation policies.
The study shall also be concerned with the interrelationships between the
policies and underlying factors and their impacts on the companies.
The inventory policies under consideration in this study shall be limited to
inventory policies used for valuing the finished goods, as the value assigned to
the finished goods also covers the costs of raw materials and work-in-progress,
along with other direct costs and factory overheads incurred. Also, many studies
carried out by Nigerian authors previously in this field of accounting research
were not particularly related to inventory policies in manufacturing companies,
studies like Adeyemi et al (2010) examined the use of EOQ theory in inventory
management in a manufacturing company (Coca-Cola, Ilorin Plant),focusing
mainly on the importance of inventory management in manufacturing
companies.

11

1.8

ORGANIZATION OF THE STUDY

This study is structured into five chapters. The first chapter introduces the
research topic, gives its background, and states the problem to be researched
upon, the objectives of the study, the research questions and the research
hypotheses put forward. It also provides the scope, limitations and methodology
to be used in carrying out the study.
The second chapter reviews the existing literature on the choice of inventory
valuation methods by manufacturing companies. It also considers the relevant
concepts in the development of a model of the use of inventory valuation policy
in a manufacturing company.
Chapter three describes the planned research methodology which details out the
ways in which the research will be conducted. It contains the research design,
data collection method, population, sample and sampling techniques and the
techniques used in analysing the data collected by the researcher.
Chapter four provides the required analysis and presentation of data collected
through the methodology adopted for the research.
Chapter five contains the summary, conclusions and recommendations based on
the results of the data analysed.

12

1.9

DEFINITION OF TERMS

Inventory: This is defined as a detailed, itemized list, report, or record of

things in one's possession, especially a periodic survey of all goods and
materials in stock. Inventories are the life of the business and are essential for
manufacturing businesses. This is because inventories are necessary in order to
generate sales and, in return, sales generate profit for the business. For the
purpose of this study, inventory will be considered with relation to the
manufacturing sector.
Inventory valuation:

This is defined as the determination of the cost

assigned to raw materials inventory, work-in-progress, finished goods and any

other inventory item. It is the lower of cost or market value applied on an item
by item basis, a category basis or a total basis.
Raw material inventory:

This is the opening or closing balance of raw

materials on hand for an accounting period. It represents items that will be a

component of a produced good. The opening and closing balances are shown in
the manufacturing account, when the cost of goods manufactured is presented,
while the closing balance alone is reported in the balance sheet.
Work- in-progress:

This is defined as inventory that is at a stage between

raw materials and finished goods which must be accounted for when valuing
inventory for accounting purposes. The opening and closing balances of work-

13

in-progress are shown in the cost of goods produced/ cost of production section
of the manufacturing, trading, and profit and loss account. The closing balance
is shown as a current asset in the balance sheet.
Finished goods inventory:

This is the amount of manufactured products on

hand that is available for sale to customers. The closing balance is shown as a
current asset in the balance sheet, while both the closing and opening balances
are shown in the trading account when the cost of goods sold is presented.

14

REFERENCES
JOURNALS
Adeyemi S. L. and Salami A. O. (2010) Inventory Management: A Tool of
Optimizing Resources in a Manufacturing Industry. A Case Study of
Coca-Cola Bottling Company, Ilorin Plant, Journal of Social Sciences,
Vol. 23(2); pp. 135-142.
Ball, R. (1972) Changes in Accounting Techniques and Stock Prices, Journal
of Accounting Research, Vol. No. 10, pp. 1-38
Ibarra, V. (2008) Choice of Inventory Costing Method of Selected Companies
in the Philippines, Journal of International Business Research, Vol.
7(1), pp.1-8.
Sunder, S. (1973) Relationship between Accounting Changes and Stock Prices:
Problems of Measurement and Some Empirical Evidence, Journal of
Accounting Research, Vol. No. 11; pp. 1-45

INTERNET
Codjia,

M.
(2011)
Types
of
Accounting
Policies
online
http://www.ehow.com/list_6717572_types-accounting-policies.html
accessed on 3rd August, 2011.

Kulkarni, A. (2010) Inventory Valuation Methods,

http://www.buzzle.com/ accessed on 15th February, 2011.
Mugo,

online

at

F.W
(2011) available
online
at
www.social research
methods.net/tutorial/Mugo/tutorial.htm accessed on 25th July, 2011.

15

CHAPTER TWO
LITERATURE REVIEW
2.0

INTRODUCTION

This chapter focuses on the history of accounting standards on inventory

valuation, the review of prior literature and of studies previously carried out in
the aspect of accounting relating to inventory valuation policies. It also
considers the relevant concepts in the development of a model of the use of
inventory valuation policy in a manufacturing company, their importance, and
the factors to consider in selecting an inventory valuation policy.

2.1

THE

CONCEPT

OF

INVENTORY

AND

INVENTORY

VALUATION
The word inventory is defined from the Middle French word inventaire,
which means a detailed list of goods. It can therefore be defined as the stock of
items present with the company which are to be used in the process of
production, that is, a company's merchandise, raw materials, and finished and
unfinished products which have not yet been sold. This means that the items
which are held for sale in the ordinary course of business or which are in the
process of production for the purpose of sale, or which are to be used in the
production of goods or services which will be for sale can be defined by the
16

word inventory. According to Ibarra (2008), inventories are the life of the
business because they are necessary in order to generate sales and, in return,
sales generate profit for the business, stressing that cost of the inventory at the
end of an accounting period is crucial because of its effect on the cost of goods
sold and ultimately on the computation of profits. Inventory is also reflected as a
current asset on the balance sheet, and the way in which a company accounts for
its inventory can have a dramatic effect on its financial statements. Therefore,
the valuation of inventory directly affects the inventory, total current assets, and
total assets balances. Companies intend to sell their inventory, and when they
do, it increases the cost of goods sold, which is often a significant expense on
the income statement. Therefore, how a company values its inventory will
determine the cost of goods sold amount, which in turn affects gross profit
(margin), net income before taxes, taxes owed, and ultimately net income. It is
clear, then, that a company's inventory valuation approach can cause a ripple
effect throughout its financial picture. The use of different accounting policies
on inventory can cause different effects on the quality of information presented
in the profit and loss accounts and the balance sheet, and where there is no clear
regulation as to how these policies are used, the directors of these companies
therefore have the free rein to manipulate these policies to suit their own needs
and give false impressions and distorted pictures of the state of affairs of these
companies. We will now look at the efforts made to put regulations in place and

17

set standards for the use of inventory valuation policies in Nigeria, the United
Kingdom and the United states.
2.1.1 HISTORICAL BACKGROUND ON ACCOUNTING STANDARDS
FOR INVENTORY VALUATION
Standards were first set for inventory valuation policies in the early 1940s, when
the Taxation and Financial Relations of the Institute of Chartered Accountants
of England and Wales (I.C.A.E.W) was established and given the mandate of
considering and making recommendations of certain aspects of the accounts of
companies; and publishing approved recommendations for the information of
members. At that time, the importance of the members of companies being
informed of the practices and policies of the companies was being brought to
light. The accounting standard for inventory valuation was contained in the first
collection of recommendations for accounting principles, issued as the standard
for the valuation of stock-in-trade (Recommendation No. 10). In October 1960,
recommendation No. 10 was replaced by No. 22 (Treatment of stock-in-trade
and work in progress in financial accounts) which includes not only the
valuation of stock in trade, but also of work- in- progress, making the standard
applicable to manufacturing companies, not just merchandising/retailing
companies. It also recommends how these valuations should be reflected in the
financial statements.

18

However, it was within this period (1942-1969) that questions were being raised
as to the quality of information presented by the companies, perhaps owing to
the fact that the recommendations, though influential in directing how
companies should carry out financial reporting, did not require strict
compliance. This was because they were, as Robert G. Day (Day, 2000) put it,
non-mandatory but did express an authoritative statement on accounting
which improved existing practices at that time. Added to this problem was the
incidence of the failure of two large companies in the UK, and other major
incidents involving major companies where accounting practice was suspected
to be a major, if not primary cause of these incidents. This entails that the
recommendation may not have been followed, or may have been manipulated to
suit the directors needs.
Therefore in December 1969, as an attempt to remedy these problems, the
English Institute of Chartered Accountants published A Statement of Intent on
Accounting Standards, leading to the creation of the Accounting Standards
Steering Committee (A.S.S.C) in January 1970, and the setting of accounting
standards beginning in 1971. It was in May 1975 that recommendation No.22
was replaced by Statement of Standard Accounting Practice (SSAP) No. 9
(Stocks and Long Term Contracts).
Another accounting standard that has been issued with respect to inventory
valuation policies is International Accounting Standard (IAS) No. 2 (revised),
19

issued in December 1993 and replacing I.A.S 2- Valuation and Presentation of

Inventories in the context of the historical cost system, which was issued in
October 1975. I.A.S 2 is the most recent development in the setting of
accounting standards, as it is part of the accounting standards to be followed by
companies adopting the International Financial Reporting Standards (I.F.R.S) in
the preparation and presentation of their financial statements.
Under S.S.A.P No. 9, a company can adopt the Last-In-First-Out (LIFO) policy
of inventory valuation; however, this is not the case with companies adopting
International Financial Reporting Standards (I.F.R.S) in the context of I.A.S 2
revised. Under I.A.S 2, goods/services produced/segregated for their specific
projects and inventories of items not ordinarily interchangeable are valued using
specific identification of individual costs (paragraph 23). For inventories
meeting either of these criteria, the specific identification method is mandatory
and alternative methods cannot be used (paragraph 23). In addition, other goods
apart from those mentioned in paragraph 23 shall be assigned using the First-InFirst-Out or Weighted Average methods, stating that the same cost formula shall
be used for all inventories of similar nature and use to the entity, though
different cost formulas can be used for inventories with a different nature/use.
This standard expressly states that it does not permit the use of LIFO to measure
the cost of inventories (paragraph IN13) so as to serve the goals of achieving

20

convergence among accounting standards, and of promoting uniformity across

entities reporting under the IFRS.
It is important to note that IAS 2 revised and S.S.A.P No. 9 state that cost should
be valued at the lower of cost or net realisable value.
In the United States, Generally Accepted Accounting Practices (GAAP) requires
that inventory be valued at the lower of cost or market. Market is usually equal
to current replacement cost; however it cannot be greater than the net realisable
value or the net realisable value less a normal profit margin. GAAP also permits
the use of LIFO, just like S.S.A.P No. 9. However, initial valuation is at cost
when it is first recognised.
In Nigeria, the relevant accounting standard issued to address inventory
valuation was the Standard Accounting Standard No. 4 (on stocks), which
became operative in January 1987. The standard explains that the use of several
methods for valuing and reporting stocks gives rise to wide differences in the
results of the operations of enterprises in the same line of business, and that it
seeks to narrow such differences by setting a standard for the valuation and
presentation of items of stock, doing this in the context of the historical cost
concept. The historical cost concept holds that cost is the appropriate basis for
the initial accounting recognition of all assets acquisitions, services rendered or
received, expenses incurred, and creditors and owners interests. It also holds
that subsequent to acquisition, cost values are retained throughout the
21

accounting process. SAS 4 also states that stocks should be valued at the lower
of cost or net realisable value (p. 44). It also permits the use of FIFO, Average
Cost, Specific Identification, Standard Cost and the adjusted selling price
methods for the valuation of stock, leaving out the Latest Purchase Price, LIFO,
and base stock methods for selection. In compliance with the standards,
companies are required to state the accounting policies in respect of inventory in
their financial statements.

2.2

THEORETICAL FRAMEWORK

A theoretical framework is defined as a frame of reference that serves to guide a

research study and is developed from theories, findings from a variety of other
studies, and the researchers personal experiences.
A theoretical framework is a collection of interrelated concepts, like a theory but
not necessarily so well worked-out. A theoretical framework guides your
research, determining what things you will measure, and what statistical
relationships you will look for.
The theoretical framework is supposed to help the reader make logical sense of
the relationships of the variables and factors that have been deemed
relevant/important to the problem. It provides definition of relationships

22

between all the variables so the reader can understand the theorized relationships
between them.
Since 2007, the cost of inventories is determined on the FIFO, the specific
identification method or weighted average basis by the newest accounting
standards. Many studies have been conducted and published regarding inventory
costing methods used by companies in the United States and in Europe, putting
forward various theories as regards the reasons why managers select certain
inventory valuation methods for their finished goods inventory.
Chung and Narasimhan (2003) proposed that the managers selected the
inventory valuation policies based on the financial characteristics of the
companies, which included the materiality of the inventory held as per the
current assets in total, which is important in assessing the efficiency of the
inventory management capability of the firm, and the leverage ratio of these
firms, which is important in assessing the stability of these companies (i.e. the
proportion of the firm which is exposed to external debt). However the authors
were only determining the rationale behind the choices of inventory valuation
methods chosen by these companies based on whether or not these companies
can use the LIFO method for their international operations.
Although Chung and Narasimhan (2003) concluded that most multinational
companies chose the LIFO method, they stated that these companies will
continue to do so only if the value of their sales increased, otherwise they were
23

most likely to change to non-LIFO policies if any changes were to occur in the
financial structure of the companies, as shown by their financial characteristics
(increased exposure to external debt, increased inventory materiality, increased
capitalised costs incurred on fixed assets). They however did not consider the
nature of business that these firms belong to, which is supported by Ibarra
(2008) who discovered that the choice of ending inventory valuation is not
affected or dictated by the company's nature of business. Rather the two
variables seemed independent of each other.
Ibarra (2008) however discovered that the type of inventory managed by a
company has a significant relationship with the choice of using FIFO, though
some care has to be taken in extending this relationship to the use of the
weighted average method, because companies whose inventory costs are
unstable, and whose inventories are varied, are the primary users of this method,
and this includes pharmaceutical companies and oil companies. Companies in
the Food and Beverage industry make use of this method due to the perishability
of their products and the fluctuations in the costs of acquiring their products.
It is however important to note that though Chung and Narasimhan (2003) had
successfully determined why most multinational companies used a particular
method, financial ratios and indices are mere indicators, which are subject to
error, both implicit (i.e. the definitions of these ratios, the variables to be
considered in their computation) and explicit (i.e. errors that may occur from the
24

computation itself). So these ratios may not present an accurate picture of the
situation within those companies.
Cushing and LeClere (1992) created a multivariate model comprising of a
comparison of long-time FIFO and LIFO users which they used in testing
variables that influence inventory valuation policy choice. They included a tax
savings variable in their analysis, along with other factors like the physical
characteristics of the inventory they manage, such as the variability/variation of
their inventory and the rate of obsolescence of their inventory.
They discovered that tax savings is the dominant reason why firms use LIFO,
and that other firms use FIFO for a combination of reasons which include LIFO
bookkeeping costs, contradictory tax and reporting rules on accounting for
inventory obsolescence, effects on debt covenants, and the requirements of FIFO
for government contracts, though no singular reason was prevalent. They
therefore concluded that both tax and non-tax considerations influenced the
choice of an inventory costing system, which supports Chung and Narasimhan
(2003), who considered mainly non-tax aspects of the inventory valuation
policies, even though they did not consider the differences in the reported
incomes of these companies.
Notably, all these authors did not include differences in reported income as a
variable to include in their research, a factor which is considered by most
managers, as argued by Bar-Yosef and Sen (1992). They claimed that inventory
25

accounting rules may have a production repercussion on the firm that affects
shareholders wealth because managers, paid by an accounting-income based
contract, can potentially distort the operation while maximising their payoffs.
Thus, shareholders can use these rules either directly or indirectly to implement
their preferences and control the managers.
Bar-Yosef and Sen (1992) explained that the absence of taxes and inflation
highlights FIFO as the first-best decision rule, as it results in the highest reported
income, compared to other methods. However, the introduction of taxes causes a
divergence of the preferences of the shareholders and managers which may lead
to operating distortions (resulting in distortions of operating income and
reported income). Out of these distortions, an inventory valuation policy
decision must be made and this decision must optimise the trade-off between the
operating distortions (known as the incentive effect) and the tax gain derivable
from the use of LIFO. It must also align the managers interest as much as
possible with those of the shareholders.
Most of these studies focused on two inventory methods- FIFO and LIFO. Very
little research has been carried out on the other methods, namely weighted
average method and specific identification. Also, the studies under review have
focused on the choices being based on the nature of the inventory managed by
the firms as well as the nature of their businesses, ignoring the changes in
reported income caused by the use of these methods. In spite of the tax benefits
26

that accrue to companies that use LIFO, most of the companies that have been
studied still choose to use non-LIFO methods, and this cuts across industries.
This study therefore aims to find out if this is the same case in the Nigerian
manufacturing sector and to find out the reasons for this behaviour among the
companies, and to determine whether the reported incomes of these firms are a
factor considered by their managers. It must be pointed out that for financial
reporting purposes, LIFO is no longer allowed in Nigeria, so this method will
not be considered in this study.
2.3

CONCEPTUAL FRAMEWORK

A conceptual framework can be defined as a theoretical structure of

assumptions, principles, and rules that holds together the ideas comprising a
broad concept.
2.3.1 INVENTORY VALUATION POLICIES
Different methods of inventory valuation will directly affect the manufacturing,
trading, profit and loss accounts as a whole, and the current asset schedule of the
balance sheet which includes indicators, investment decisions, financing plans;
enterprises can also use this for tax planning, earnings management, crucial to
the suitability or otherwise of their choice. Based on accounting standards, the
inventory valuation policies available for selection by manufacturing companies
are discussed, namely:
27

First- In- First- Out Method (FIFO)

The FIFO method of inventory valuation requires that the inventory which came
in first will be used first, which sounds like a fairly logical and plausible
situation. Hence the inventory which comes in first will be used or resold first.
So if we have 4 different inventory prices at say N1, N1.30, N1.90 and N2 and
the company follows the FIFO inventory valuation method, then the N1
inventory will be used up first and so on.
According to Schroeder et al (2010), FIFO is based on assumptions about the
actual flow of merchandise throughout the enterprise i.e. it is an approximation
of the specific identification method. The FIFO method satisfies the historical
cost and matching principles since the amount for cost of goods sold is similar to
the amount that would have been recorded under specific identification if the
actual flow of goods were on a FIFO basis. Moreover the valuation of the unsold
inventory reported on the balance sheet more closely resembles the replacement
cost of the items on hand and thereby allows financial statement users to
evaluate future working capital flows more accurately.
This method of inventory valuation is generally looked at as the better indicator
of the inventory position (Ibarra, 2008). By using up the inventory items which
came in first and selling them, there is no risk of loss due to spoilage or
obsolescence, which is why this method is used by most companies, especially
those, whose inventory comprises of consumables and perishable products.
28

According to Ibarra (2008), most companies believe that the method will match
the actual flow of goods from the warehouse to the stores. This method costs
less to implement as it simply reflects the actual flow of goods along the chain
of production and distribution.
However, Banerjee (2006) claims that FIFO is more suitable in times of falling
prices. Schroeder et al (2010) explains this claim in this way:
Including older and lower unit costs in cost of goods sold during a period of inflation causes
a an inflated net profit figure that may mislead financial statement users could also result in
the payment of additional income taxes. (p.266)

But since most companies turn over their inventory fairly rapidly, this argument
may be doubtful in most instances.
Weighted Average Method
This method is one type of a set of various styles of techniques, known as
averaging techniques/average price techniques (Banerjee, 2006). Schroeder et al
(2010) describes averaging as a compromise position between FIFO and LIFO
(Last-In-First-Out). The weighted average inventory valuation method assumes
the weighted average cost of all inventory purchased and then the items going
out of the inventory are valued at that rate.
According to Schroeder et al (2010), the use of averaging affects both inventory
valuation and the cost of goods sold, therefore it does not result in either a good
match of costs with revenues or a proper valuation of inventories, especially in
fluctuating market conditions, though this claim is refuted by Banerjee, who
29

states that the use of the weighted average method smoothens out fluctuations in
prices, though it can be quite tedious to calculate (Banerjee, 2006).
Schroeder et al (2010) expands further on his claim, stating that though a claim
can be made on the use of the Weighed Average method that the cost of goods
sold is reflective of the total periods operations; the resulting inventory
valuation is not representative of the expected future cash flows. This is
supported by Banerjee (2006), who affirms that there is some difficulty attached
to verifying the value of the closing stock figure since the identity of the
products in inventory disappear under the use of this method (Banerjee, 2006, p.
94).
Specific Identification Method
This method identifies the cost of each item of inventory, i.e. it concentrates on
the physical identification and linking of the particular items sold. An obvious
way to account for inventory through this method is via physical observation or
the labelling of items in stock with individual numbers or codes. Such an
approach is easy and economically justifiable for relatively expensive
merchandise. The specific identification method, however, is cumbersome in
situations where a company owns a great deal of inventory and each specific
inventory item is relatively indistinguishable from each other.

30

Schroeder et al (2010) explains that most companies find that the required
record-keeping associated with the procedure outweighs any expected benefits.
This method is therefore feasible when the volume of sales is low and the cost of
individual items is high, for example, with items like jewellery, automobiles,
yachts and works of art. Therefore, companies in the automobile industry will be
expected to use this method.
Mussa (2009) asserts that the specific identification method is a 100per cent
accurate method of stock valuation because of two reasons: (i) the cost of sales,
and gross and net profit are accurate; (ii) the value of stock and owners equity
(due to profit impact) are accurate as well. This, in effect, makes the information
contained within the reports generated reliable. Hence the specific identification
method promotes the reliability characteristic of the financial statements.
However Schroeder et al (2010) disproves this claim, stating that this method
has low informational content to balance sheet readers because the valuation of
inventories at original cost generally has little relation to future expectations.
It is important to note that these methods exist on simply the one assumption
that the prices of inventory increase and decrease. If they were to remain the
same throughout, then there would be no inventory valuation methods
whatsoever.

31

2.3.2 THE IMPACT OF INVENTORY VALUATION POLICIES ON

REPORTED INCOME
As earlier mentioned, inventory valuation policies are used to determine the cost
of goods produced by a firm, starting from the cost of raw materials, to the cost
of work in progress, and finally to the total costs assigned to the finished goods,
all other things being equal. To describe the effects of the inventory valuation
policies used by a particular firm A on its reported income, the following
assumptions will be made:
The sole business carried out by firm A is the manufacture and sale of one
product;
It purchases its raw materials from several suppliers and makes its sales to a
several buyers/customers;
Its tax liability is determined based on the reported income for each accounting
period;
In view of these, the use of inventory valuation policies in the course of costing
Firm As production process and determining its reported income is seen below:

FIGURE 2.1 Diagram of the Manufacturing, and Trading, Profit and Loss Accounts,
Showing the Effect of Inventory Valuation on the Reported Income of Firm A

32

Admin & Selling

(operational) expenses

Other direct costs and

factory overheads
Valuation of
raw materials
inventory

Cost of
production/valuation
of finished goods
inventory

Valuation of Work-inprogress inventory

Gross
Profit

Reported
Income

Sales

Relevant
costs/expenses

Flow of cost/profit

Matching of
sales with
cost

Source: The Researcher, designed for the current study

From the diagram above, the values of raw materials and work-in-progress
inventories have a part to play in determining the total cost of the goods
manufactured by firm A. however the value of the cost of the finished goods
consists of these two values, as well as all other costs incurred in the course of
production. When sales are made over the firms accounting period and the
income generated from carrying out the firms ordinary business (which, in this
case is the manufacture and sale of products) is to be determined, the revenues
received during the period are matched with the cost of production (which is
derived based on the inventory valuation method used by the firm). At this point
it will be noted that the higher the cost of production, the lower the gross profit

33

made; and in the absence of any other income generating venture, the lower the
reported income generated by the firm.

2.3.3 IMPORTANCE OF AN EFFECTIVE INVENTORY VALUATION

POLICY
An effective inventory valuation policy is one which correctly and accurately
determines the costs of inventory managed by a firm. Carnes et al (1992)
describes an effective inventory valuation policy as one which (i) conforms to
the best accounting practice in the trade or business i.e. it can serve as a
surrogate for GAAP; and (ii) clearly reflects income. This implies by extension
that it also clearly states the tax liability of the firm, as well as a clear picture of
the firms cash flow. This is because clearly stating income will derive an
accurate determination of the tax liability of the firm. Proper inventory valuation
also enhances the accuracy and reliability of the financial statements of the firm,
helping the firm to gain credibility with creditors (in situations where loan
agreements and debt covenants are based on accounting ratios), the government,
shareholders, the relevant tax authorities, and the general public.
The basic function of inventories whether they are raw materials, work-inprogress or finished goods, is that they facilitate decoupling the operations
involved in converting inputs into outputs. This allows the successive stages in

34

the purchasing, manufacturing and distribution process to operate reliance on the

schedule of output, of prior activities in the production process. Therefore, an
effective inventory valuation policy implies a proper costing of each stage in the
production process.

2.3.4 THE SELECTION PROCESS OF AN INVENTORY VALUATION

POLICY: FACTORS TO CONSIDER
It is important to note here that GAAP does not require that the assumed costs
correspond to the actual flow of goods. Therefore firms are given the freedom to
select from the permitted inventory valuation policies (FIFO, Weighted average,
and Specific identification). However, any inventory valuation policy selected
by a firm can affect the firm in significantly diverse ways; therefore the
managers have to be careful in selecting a policy to use. These factors can be
divided into two categories: internal and external factors.
INTERNAL FACTORS
Firstly, the manager has to consider the shelf life/rate of obsolescence of the
product(s). The shelf life of a product is defined by the length of time before the
product becomes unsuitable for use. Therefore, the FIFO policy would be best
suited for perishable goods. However, firms that engage in mass production of
durable products would prefer the other two methods.

35

In addition, the manager also must consider the nature of the production
processes engaged by the firm, which could be in batches, by jobs, or
continuously (mass production), and the cost of implementing any of these
policies. The Specific identification policy is more expensive to implement
relative to the other policies, especially in economies where the cost of labour is
high, because this method is more manually intensive than the other two
methods.
Because FIFO increases reported net income in a period of rising prices, FIFO
may also increase the compensation of managers who have bonuses based on
reported income. This could boost managements motivation to adopt FIFO.
EXTERNAL FACTORS
These include effects on loan agreements, the quality of financial information
produced, the effects of reported results on investors and taxes and other
environmental conditions.
In preparing tax returns for the government, the type of inventory valuation used
will determine the cost of goods sold, thus affecting the income reported by the
firm and affecting the tax liability of the firm. FIFO assigns the older and lower
costs to inventory, which results in a higher reported income by the firm.
Therefore, the tax liability of the firm will be higher than if it used other
policies.

36

Also a firm that reports higher incomes consistently will be perceived as

lucrative by most investors, motivating them to invest more in such firms. In this
same vein, a firm that reports lower incomes will most likely divert investors
from such firms.
Many firms have loan agreements that require them to maintain certain levels of
financial ratios. The current ratio is one example. Given that during a period of
rising prices, FIFO results in a higher inventory figure, current assets will also
be higher. This results in a higher current ratio and a lower likelihood of loan
agreement violations. A number of other ratios will be similarly affected. When
adopting any inventory policy, managers must be confident that the use of such
policies will not result in levels of financial ratios that violate existing loan
agreements.
FIFOs ending inventory calculation is based on a firms most recent acquisition
costs. Thus, the inventory amount on the balance sheet is likely to be very close
to current value, though the profit and loss figures are more historical than
current. However, the average cost policy spreads the costs over all the units
produced so both the balance sheet value and the profit and loss figures are
neither historical nor current value. So the inventory valuation policy selected
affects the quality of information produced by the firm.
Finally, other factors to consider include the policies used by other firms within
the industry, as described by Carnes et al (1992); and government regulations.
37

It is important to note that the effects described above occur only during a period
of rising prices, or inflation. The effects will be different during periods of
deflation or stability.

38

REFERENCES
Banerjee, B. (2006) Cost Accounting Theory and Practice (12th ed.); India:
PHI Learning Pvt. Ltd.
Bar-Yosef, S. and Sen, P. K. (1992) On Optimal Choice of Inventory
Accounting Method The Accounting Review, Vol. 67(2), pp. 320-336.
Retrieved from http://www.jstor.org/stable/247727 on 25/08/2011.
Carnes, G.A. and Englebrecht, T.D. (1992) The Internal Revenue Service's
increasing power with the clear reflection of income standard Tax
Executive, Vol. 6, pp. 1-8. Accessed from
http://findarticles.com/p/articles/mi_m6552/is_n6_44/ai_13096933/pg_3
/?tag=content;col1 on 10/08/2011.
Chung, S. and Narasimhan, R. (2003) An Empirical Analysis of the Inventory
Methods OF U.S. Multinational Companies: Segment effects. Paper
presented at the Seventh International Conference on Global Business
and Economic Development, Bangkok, Thailand; January, 2003.
Cushing, B. E. and LeClere, M. J. (1992) Evidence on the determinants of
Inventory Accounting Policy Choice The Accounting Review, Vol.
67(2), pp. 355-366.
Day, R.G. (2000) UK Accounting Regulation: An Historical Perspective
Being Working Paper No. 20 in the Working Paper series presented in
the School of Finance and Law, Bournemouth university, Dorset,
London.
Ibarra, V. (2008) Choice of inventory costing method of selected companies in
the Philippines. Journal of International Business Research, Vol.
7(1), pp.1-8.
Knight R.F., Affleck-graves J.F. and Hamman W.D. (1985) The Effect of
Inventory Valuation Methods on Share Prices: Some New Evidence for
the JSE. Investment Analysts Journal, Vol. 26, 45-47.
Schroeder R.G., Clark M.W. and Cathey J.M. (2010) Financial Accounting
Theory and Analysis: Text and Cases; New York: John Wiley & Sons.

INTERNET
Mussa (2009) "FIFO" online at http://www.docstoc.com/docs/5070221/FIFO ,
accessed on 07/09/2011.
39

CHAPTER THREE
RESEARCH METHODOLOGY
3.0

INTRODUCTION

This chapter focuses on the research methodology to be carried out in the course
of this study, the research design, population characteristics, sample size and
sampling techniques, the sources of data, research instruments used, and the
methods of data analysis employed, with the decision rules to be followed at the
completion of the analysis.
3.1

RESTATEMENT OF RESEARCH QUESTIONS

The research questions are restated here as follows:

What are the inventory valuation policies available to a manufacturing
company?
Do inventory valuation policies affect the reported incomes of manufacturing
companies?
What are the factors a manager should consider when selecting an inventory
valuation policy?

40

3.1.1

RESTATEMENT OF RESEARCH HYPOTHESES

The research hypotheses are restated here as follows:

HYPOTHESIS I
H0

The inventory policies available to a manufacturing company are not the

First-In-First-Out, Weighted Average and the specific identification
methods.

H1

First-In-First-Out, Weighted Average and Specific Identification are the

methods available to manufacturing companies.

HYPOTHESIS II
H0

There is no relationship between the inventory valuation policy used by a

manufacturing company and its reported income.

H1

The reported income of a manufacturing company affects its selection of

an inventory valuation policy.

HYPOTHESIS III
H0

There is no relationship between the inventory valuation policy used by a

manufacturing company and its tax liability.

H1

The tax liability of a manufacturing company affects its selection of an

inventory valuation policy.

41

3.2

RESEARCH DESIGN

The research design adopted for this study is the descriptive survey design. This
means that the relevant data collected for the research through this method were
through the researchers personal fieldwork by the use of questionnaires,
observations and personal interviews of the respondents.
3.2.1

SOURCES OF DATA

Responses generated from the questionnaire will serve as the primary source of
data for the study. The secondary sources of data for this study consist of journal
articles, articles published on the internet and textbooks.
3.3

POPULATION

The population, for the purpose of the study comprises of all manufacturing
firms listed in the Nigerian Stock Exchange which consists of firms from the
following industries: Beverages, Building Materials, Chemicals, Food,
Healthcare, Manufacturing & Industrial, and Textiles, making a total of 72
companies. The primary focus of the study is on companies that are situated
within Lagos State, thus limiting the number of eligible companies to 35 in
number.
3.4

SAMPLING AND SAMPLING TECHNIQUES

The sampling technique used in this study is the stratified sampling technique
where a stratified sample is obtained by independently selecting a separate
42

simple random sample from each population stratum. A population can be

divided into different groups based on some characteristics or variables, which,
in the context of this study, are the industries which these firms belong to. A
total of 18 companies from each industry will be selected. Key personnel is
made up of at least 2 from each of the aforementioned companies will be
interviewed.
The sample size therefore consists of 36 employees from the following
departments in each company: Finance, Supply/Warehouse.
3.5

DATA COLLECTION INSTRUMENT

The data collection instrument to be used for the study is the questionnaire,
which will be self-administered and collected directly. The questionnaire will be
a structured questionnaire, designed to deal with comprehensively on inventory
valuation policies. The questionnaire will be divided into 3 parts. Part A
requiring the bio-data of the respondents and Part B requiring information about
the company and testing the respondents knowledge of inventory and inventory
valuation, and Part C containing carefully worded questions relating to the study
and testing the respondents understanding of the topic and questions about the
respondents opinion of the inventory valuation policy selected.

43

3.5.1

ADMINISTRATION OF INSTRUMENTS

The questionnaire will be administered by the researcher in person. The

respondents for this study are the financial managers/directors of each company,
as they have a knowledge of the accounting and financial policies of the
companies within which they serve. Therefore they will be able to provide
information that will be relevant to the study.
3.6

DATA ANALYSIS

This study utilizes the highly dependable statistical software called Statistical
Package for Social Scientists (SPSS). The Likert scale is used in drafting the
questionnaire made so that it is made adaptable to SPSS. The following
statistical techniques were used:
Simple percentage
This statistical tool will essentially help in categorising the responses given by
the respondents into the different groups as contained in the questionnaire and
express each groups figures in percentages terms to determine the agreement or
otherwise with the research questions by the respondents.
Chi-square
For the purpose of this study, the chi-square test of independence and
homogeneity will be applied to determine if there is any relationship between
the managers choice of inventory valuation policy and the reported incomes of
44

the firms they manage. The following formula is used in computing the chisquare value for the data:

(O
=
2

- Ei )

Ei

where Oi = observed frequency, Ei = expected frequency

3.6.1

DEFINITION OF VARIABLES

For the purpose of this study, the independent variable X shall be defined as the
inventory valuation policy selected by the firm, while the dependent variable Y
shall be the reported income of the firm.
3.6.2

DECISION RULE

The null hypothesis will be tested at the 5per cent level of significance with
95per cent confidence level. If the calculated value is greater than the table
value, the null hypothesis shall be rejected. But if the table value is greater than
the calculated value, the null hypothesis shall be accepted.
3.7

LIMITATION OF THE RESEARCH METHODOLOGY

Limitations can be defined as extraneous circumstances that can cause

imperfections in the application of the methodology. In view of this, the
bureaucratic nature of most of manufacturing firms, requiring that protocol is

45

followed before meeting the respondents, will result in delays in responses from
the respondents.
In addition to this, the unwillingness and general reluctance of company
reluctance of company employees to release information for fear of letting out
trade secrets may further limit the truthfulness and consistency of the responses
generated using this methodology.
Finally, the locations of these firms may also cause imperfections in the
methodology as these firms are spread over the Lagos metropolis, therefore
causing some difficulty in gaining access to these firms.

46

CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0

INTRODUCTION

This chapter of the research study entails a clear representation and analysis of the
data collected from sampled respondents using the methods and tools discussed in
chapter three. The objective of this analysis is to allow for the testing of the
hypotheses earlier formulated in chapter one, in order to validate or reject the
various assumptions made. A total of thirty-six (36) copies of questionnaire were
administered to the sample size selected, and all the questionnaires were returned,
indicating 100per cent response rate.

4.1

ANALYSIS OF RESPONDENTS CHARACTERISTICS

This section presents the findings on the characteristics of the stakeholders in a

tabular form. Attempts have been made to classify the respondents according to
their demographic characteristics such as sex, age, educational background, and
area of specialization.
Table 4.1

SEX DISTRIBUTION OF RESPONDENTS

Frequency

Percent

MALE

26

72.2

FEMALE

10

27.8

Total

36

100.0

Source: Field survey, 2011

47

Table 4.1 shows that 26 respondents representing 72.2 per cent are male while
which far exceeds the female respondents which are 10 respondents representing
27.8 per cent. This suggests that the population of respondents required for the
study is male-dominated.
Table 4.2

AGE DISTRIBUTION OF RESPONDENTS

Frequency

Percent

UNDER 21 YEARS

2.8

21-30

11.1

31-35

10

27.8

36-40

14

38.9

40 YEARS AND ABOVE

19.4

Total

36

100.0

Source: Field survey, 2011

Table 4.2 shows that 14 respondents representing 38.9 per cent are within the
age range of 36 to 40 years, closely followed by 10 respondents representing
27.8 per cent within the age range of 31 to 35 years, 7 respondents representing
19.4 per cent are 40 years and above, 4 respondents representing 11.1 per cent
are within the age range of 21 to 30 years while 1 respondent representing 2.8
per cent is below the age of 21 years. This suggests that majority of the
respondents are in their thirties. However, the data gathered covers all the major
working age groups within the organization.

48

Table 4.3

EDUCATIONAL BACKGROUND OF THE RESPONDENTS

Frequency

Percent

SSCE/OND

11.1

B.SC/HND

25

69.4

M.SC

19.4

Total

36

100.0

Source: Field survey, 2011

Table 4.3 shows that 25 respondents representing 69.4 per cent have a
B.SC/HND, 7 respondents representing 19.4 per cent have a M.Sc., and 4
respondents representing 11.1 per cent have a SSCE/OND, suggesting that
majority of the respondents have gone through the higher institutions of
learning. This is good for the purposes of the study.

Table 4.4

SPECIALIZATIONS OF THE RESPONDENTS

Frequency

Percent

ACCOUNTING/FINANCE

18

50.0

STORES MANAGEMENT

18

50.0

Total

36

100.0

Source: Field survey, 2011

Table 4.4 suggests that there is an even distribution of the respondents
specialization, with 18 respondents specializing in accounting/finance and 18
respondents specializing in stores management, both representing 50 per cent.

49

This is also good for the purposes of the validity of the data gathered from the
respondents.
4.2

ANALYSIS OF THE RESPONDENTS INDUSTRIES

Table 4.5

DISTRIBUTIONS OF THE RESPONDENTS INDUSTRIES

Frequency

Percent

BREWERIES

5.6

BUILDING MATERIALS

13.9

CHEMICALS & PAINTS

19.4

FOOD

5.6

HEALTHCARE

16.7

MANUFACTURING/INDUSTRIAL

25.0

TEXTILES

13.9

Total

36

100.0

Source: Field survey, 2011

Table 4.5 shows that 9 respondents representing 25 per cent work in the
manufacturing/industrial sector, 7 respondents representing 19.4 per cent work
in the chemical/paints industry, 6 respondents representing 16.7 per cent work
in the healthcare industry, 5 respondents representing 13.9 per cent work in the
building materials and 5 respondents representing 13.9 per cent work in the
textiles industry and 2 people representing 5.6 per cent work in the food
industry. This suggests that all the respondents work in industries engaged in
the manufacturing sector which is in line with the focus of this study.

50

4.3

ANALYSIS OF THE RESPONSES TO QUESTIONS ON THEIR

KNOWLEDGE OF INVENTORY AND INVENTORY VALUATION

POLICIES
This section was designed to analyse the responses to questions based on the
knowledge of inventory, inventory valuation, inventory valuation policies and
their effects on financial performance appraisals. It was also designed to analyse
the policies in use by the respondents companies and their reasons for the use
of these policies.
Table 4.6

FAMILIARITY WITH THE WORD INVENTORY

YES

Frequency

Percent

36

100.0

Source: Field survey, 2011

Table 4.6 shows that all the respondents are familiar with the word inventory.
This is good for the validity of the responses given to the questions in the
questionnaire.

51

Table 4.7

CATEGORIES OF INVENTORY FAMILIAR TO RESPONDENTS

Frequency

Percent

RAW MATERIALS

19.4

RAW MATERIALS & WORK-IN-PROGRESS

2.8

ALL THREE

11

30.6

RAW MATERIALS & FINISHED GOODS

19.4

WORK-IN-PROGRESS

5.6

FINISHED GOODS

22.2

Total

36

100.0

Source: Field survey, 2011

Table 4.7 shows that 11 respondents representing 52.8 per cent are familiar with
the three categories of inventory, while 8 respondents representing 22.2 per cent
are familiar with finished goods category, 7 respondents representing 19.4 per
cent are familiar with the raw materials category only and 7 respondents
representing 19.4 per cent are familiar with the raw materials and finished
goods categories, 2 respondents representing 5.6 per cent are familiar with the
work-in-progress category and 1 respondent representing 2.8 per cent is familiar
with only the raw materials and work-in-progress categories. In all, 28
respondents category representing 77.8 per cent are familiar with the finished
goods, while 26 respondents representing 72.2 per cent are familiar with the raw
materials category. This suggests that majority of the respondents have adequate
knowledge of inventory, as well as its categories.

52

Table 4.8

INVENTORY MANAGED BY RESPONDENTS

Frequency

Percent

RAW MATERIALS

16.7

RAW MATERIALS & WORK-IN-PROGRESS

2.8

ALL THREE

22.2

RAW MATERIALS & FINISHED GOODS

11.1

WORK-IN-PROGRESS

11.1

FINISHED GOODS

13

36.1

Total

36

100.0

Source: Field survey, 2011

Table 4.8 shows that 13 respondents representing 36.1 per cent manage finished
goods for their companies, 8 respondents representing 22.2 per cent manage all
three categories of inventory, while 6 respondents representing 16.7 per cent
manage raw materials for their companies, 4 respondents representing 11.1 per
cent manage work-in-progress for their companies, and 4 respondents
representing 11.1 per cent manage raw materials and finished goods for their
companies. Also, 25 respondents representing 69.4 per cent manage finished
goods on behalf of their companies, which is good for the purposes of this
study.
Table 4.9

FAMILIARITY WITH INVENTORY VALUATION POLICIES

Frequency

Percent

NO

2.8

YES

35

97.2

Total

36

100.0

Source: Field survey, 2011

53

Table 4.9 shows that 35 respondents representing 97.2 per cent are familiar with
inventory valuation policies, while 1 respondent representing 2.8 per cent is not
familiar with inventory valuation policies.
TABLE 4.10 INVENTORY POLICIES FAMILIAR TO RESPONDENTS
Frequency

Percent

NONE

2.8

SPECIFIC IDENTIFICATION

16.7

ALL THREE

5.6

WEIGHTED AVERAGE

5.6

FIRST-IN-FIRST-OUT

15

41.7

FIFO & SPECIFIC IDENTIFICATION

8.3

FIFO & WEIGHTED AVERAGE

19.4

Total

36

100.0

Source: Field survey, 2011

Table 4.10 shows that 15 respondents representing 41.7 per cent are familiar
with the first-in-first-out (FIFO) policy and 6 respondents representing 16.7 per
cent are familiar with the specific identification policy. It also shows that 2
respondents representing 5.6 per cent are familiar with the weighted average
policy, while 7 respondents representing 19.4 per cent are familiar with both
FIFO and weighted average policies, 3 respondents representing 8.3 per cent are
familiar with FIFO and specific identification.

However, 2 respondents

representing 5.6per cent in total are familiar with all three policies and 1
respondent representing 2.8 per cent is not familiar with any of the policies, ,
suggesting that the respondents knowledge on inventory valuation policies is
limited to either one or two policies.
54

Table 4.11

INVENTORY VALUATION

POLICIES

USED FOR FINISHED

GOODS
Frequency

Percent

SPECIFIC IDENTIFICATION

19.4

WEIGHTED AVERAGE

16.7

FIRST-IN-FIRST-OUT

23

63.9

Total

36

100.0

Source: Field survey, 2011

Table 4.11 shows that 23 respondents companies representing 63.9 per cent use
the FIFO policy to value their finished goods inventory, and 7 respondents
companies representing 19.4 per cent use the specific identification policy for
their inventory. Also, 6 respondents representing 16.7 per cent use the weighted
average policy to value their finished goods. All the respondents manage
inventory for their companies.

55

Table 4.12

THE USE OF RESPECTIVE INVENTORY VALUATION POLICIES

BY RESPONDENTS COMPANIES
Frequency Percent
NATURE OF INVENTORY MANAGED

13.9

COSTS OF IMPLEMENTATION

2.8

EFFECTS ON TAX LIABILITY

2.8

TAX LIABILITY& NATURE OF INVENTORY

2.8

EFFECTS ON COST OF SALES & GROSS PROFIT

16.7

COST OF SALES, GROSS PROFIT & NATURE OF INVENTORY

11.1

COST OF SALES, GROSS PROFIT & IMPLEMENTATION & NATURE OF 1

2.8

INVENTORY
COST OF SALES, GROSS PROFIT & TAX LIABILITY & NATURE OF 1

2.8

INVENTORY
EFFECTS ON COST OF SALES, GROSS PROFIT & REPORTED INCOME

COST OF SALES, GROSS PROFIT, REPORTED INCOME & NATURE OF 3

16.7
8.3

INVENTORY
EFFECTS ON COST OF SALES, GROSS PROFIT & REPORTED INCOME & 2

5.6

COST OF IMPLEMENTATION
ALL EXCEPT TAX LIABILITY

8.3

EFFECTS ON REPORTED INCOME & NATURE OF INVENTORY

2.8

REPORTED INCOME & COSTS OF IMPLEMENTATION & NATURE OF 1

2.8

INVENTORY
Total

36

100.0

Source: Field survey, 2011

Table 4.12 shows that 6 respondents representing 16.7 per cent chose the effects
on cost of sales alone as the reasons why their companies use inventory
valuation policies, 6 respondents representing 16.7 per cent chose the effects on
cost of sales, gross profit and reported income, 5 respondents representing 13.9
per cent chose the nature of inventory managed alone, 4 respondents
representing 11.1 per cent chose the cost of sales and the nature of inventory, 3
56

respondents representing 8.3 per cent chose effects on cost of sales, gross profit,
reported income and nature of inventory managed and 3 respondents
representing 8.3 per cent chose all other reasons except tax liability. This
suggests that chief among the reasons for the use of the policies for finished
goods is its effects on the cost of sales and gross profit, which is the primary
reason given by 26 respondents, representing 72.3 per cent. The nature of
inventory managed is also a major reason given by 20 respondents representing
55.6 per cent. The effects of the inventory valuation policies on reported income
is another major reason given by 16 respondents representing 44.5 per cent. 5
respondents representing 14 per cent chose the costs of implementation, while 3
respondents representing 8.4 per cent chose the effects of inventory valuation
policies on tax liability. This suggests that the respondents believe that
inventory valuation policies are selected based primarily on their effects on cost
of sales, gross profit, the nature of the inventory managed by the company and
the effects on the companys reported income.
Table 4.13

THE EFFECTS OF INVENTORY VALUTION POLICIES TO THE

APPRAISAL OF A COMPANYS FINANCIAL PERFORMANCE

Frequency

Percent

NO

8.3

YES

33

91.7

Total

36

100.0

Source: Field survey, 2011

57

Table 4.13 shows that 33 respondents, representing 91.7 per cent believe that
inventory valuation policies affect the appraisal of a companys financial
performance. However, 3 respondents representing 8.3 per cent do not believe
that inventory valuation policies affect the appraisal of a companys financial
performance.
Table 4.14

ASPECTS

OF

FINANCIAL

PERFROMANCE

AFFECTED

BY

INVENTORY VALUATION POLICIES

Frequency Percent
NONE

11.1

COMPUTATION OF TAX LIABILITY

2.8

COMPUTATION OF COST OF SALES & GROSS PROFIT

25.0

COMPUTATION OF COST OF SALES, GROSS PROFIT & TAX LIABILITY

8.3

COMPUTATION OF COST OF SALES, GROSS PROFIT AND REPORTED 11

30.6

INCOME
ALL THREE

13.9

COMPUTATION OF REPORTED INCOME

8.3

Total

36

100.0

Source: Field survey, 2011

Table 4.14 shows that 11 respondents representing 30.6 per cent believe that
inventory valuation policies affect the computation of cost of sales and reported
income, while 9 respondents representing 25 per cent believe the policies affect
only the computation of cost of sales alone. 5 respondents, representing 13.9 per
cent believe that inventory valuation policies affect the computation of cost of
sales; reported income and tax liability and 3 respondents representing 8.3 per
cent believe the policies affect the computation of cost of sales, gross profit and
58

tax liability. 4 respondents representing 11.1 per cent believe that none of these
aspects of financial performance appraisal will be affected by inventory
valuation policies.
The overall analysis of the responses to questions in this section shows that the
respondents are familiar with inventory and inventory valuation as well their
categories. It also shows that 15 respondents representing 42 per cent are aware
of the effects of inventory valuation policies on their companys financial
performance, though their knowledge of this is limited to the policies in use in
their companies.

4.4

RESEARCH FINDINGS

This section was designed to analyse the findings on the statements

administered to the respondents to examine their opinion on the awareness of
inventory valuation policies and their effects on the company, the effects of the
knowledge of inventory valuation policies on investors and shareholders, and
the factors that a manager should consider in the selection of inventory
valuation policies.

59

Table 4.15 THE AWARENESS OF THE EFFECTS OF INVENTORY

VALUATION POLICIES IS TOO LOW IN NIGERIA.

Frequency

Percent

STRONGLY DISAGREE

5.6

DISAGREE

8.3

UNDECIDED

13.9

AGREE

16

44.4

STRONGLY AGREE

10

27.8

Total

36

100.0

Source: Field survey, 2011

Table 4.15 shows that 10 respondents, representing 27.8 per cent, strongly
agreed, and 16 respondents, representing 44.4 per cent agreed that the
awareness of the effects of inventory valuation policies is too low in Nigeria. 2
respondents representing 5.6 per cent strongly disagreed, and 3 respondents
representing 8.3 per cent disagreed with this statement, while 5 respondents
representing 13.9 per cent were neutral in their opinion. It can therefore be
concluded that the awareness of the effects of inventory valuation policies is too
low in Nigeria.

60

Table 4.16 INVENTORY VALUATION POLICIES: A CRITICAL VALUE TO

INVESTORS AND SHAREHOLDERS.

Frequency

Percent

STRONGLY DISAGREE

2.8

UNDECIDED

5.6

AGREE

12

33.3

STRONGLY AGREE

21

58.3

Total

36

100.0

Source: Field survey, 2011

Table 4.16 shows that 21 respondents representing 58.3 per cent strongly agreed
and 12 respondents representing 33.3 per cent agreed that the knowledge of
inventory valuation policies and their effects is of critical value to investors and
shareholders. However, 1 respondent representing 2.8 per cent strongly
disagreed, and 2 respondents representing 5.6 per cent were neutral in their
opinion. It can therefore be concluded that the knowledge of inventory valuation
policies and their effects is of critical value to investors and shareholders.
Table 4.17

THE USE OF INVENTORY VALUATION POLICIES ON THE

REPORTED INCOMES OF MANUFACTURING COMPANIES.

Frequency

Percent

STRONGLY DISAGREE

2.8

UNDECIDED

13.9

AGREE

10

27.8

STRONGLY AGREE

20

55.6

Total

36

100.0

Source: Field survey, 2011

61

Table 4.17 shows that 20 respondents representing 55.6 per cent strongly agreed
and 10 respondents representing 27.8 per cent agreed that the use of inventory
valuation policies affects the reported incomes of manufacturing companies.
However, 1 respondent representing 2.8 per cent strongly disagreed and 5
respondents representing 13.9 per cent were neutral in their opinion. It can
therefore be concluded that the use of inventory valuation policies affects the
reported incomes of manufacturing companies.
Table 4.18

MANAGERS SHOULD CONSIDER THE EFFECTS OF INVENTORY

VALUATION POLICIES ON THEIR TAX LIABILITY BEFORE SELECTING A

POLICY.
Frequency

Percent

DISAGREE

2.8

AGREE

24

66.7

STRONGLY AGREE

11

30.6

Total

36

100.0

Source: Field survey, 2011

Table 4.18 shows that 11 respondents representing 30.6 per cent strongly agreed
and 24 respondents representing 66.7per cent agreed that managers should
consider the effects of inventory valuation policies on their tax liability before
selecting a policy. However, 1 respondent representing 2.8 per cent strongly
disagreed with this statement. It can therefore be concluded that managers
should consider the effects of inventory valuation policies on their tax liability
before selecting a policy.

62

Table 4.19

THE

NATURE

OF

INVENTORY

MANAGED

SHOULD

BE

CONSIDERED BEFORE SELECTING AN INVENTORY VALUATION POLICY.

Frequency

Percent

DISAGREE

2.8

AGREE

15

41.7

STRONGLY AGREE

20

55.6

Total

36

100.0

Source: Field survey, 2011

Table 4.19 shows that 20 respondents representing 55.6 per cent strongly agreed
and 15 respondents representing 41.7 per cent agreed that the nature of
inventory managed should be considered before selecting an inventory
valuation policy. However, 1 respondent representing 2.8 per cent disagreed
with this statement. It can therefore be concluded that the nature of inventory
managed should be considered before selecting an inventory valuation policy.

Table 4.20

INVENTORY VALUATION POLICIES AND THEIR EFFECTS ON

REPORTED INCOME
Frequency

Percent

STRONGLY DISAGREE

2.8

DISAGREE

2.8

UNDECIDED

8.3

AGREE

12

33.3

STRONGLY AGREE

19

52.8

Total

36

100.0

Source: Field survey, 2011

63

Table 4.20 shows that 19 respondents representing 52.8 per cent strongly agreed
and 12 respondents representing 33.3 per cent agreed that the knowledge of
inventory valuation policies and their effects on reported income will enhance
the investors evaluation of the company. However, 1 respondent representing
2.8 per cent strongly disagreed, and 1 respondent representing 2.8 per cent
disagreed with this statement, while 3 respondents representing 8.3 per cent
were neutral in their opinion. It can therefore be concluded that the knowledge
of inventory valuation policies and their effects on reported income will
enhance the investors evaluation of the company.
Table 4.21

THE COST OF IMPLEMENTATION SHOULD BE CONSIDERED

BEFORE SELECTING AN INVENTORY VALUATION POLICY.

Frequency

Percent

DISAGREE

5.6

UNDECIDED

5.6

AGREE

16

44.4

STRONGLY AGREE

16

44.4

Total

36

100.0

Source: Field survey, 2011

Table 4.21 shows that 16 respondents representing 44.4 per cent strongly agreed
and 16 respondents representing 44.4 per cent agreed that the cost of
implementation should be considered before selecting an inventory valuation
policy. However, 2 respondents representing 5.6 per cent disagreed with this
statement, while 2 respondents representing 5.6 per cent were neutral in their

64

opinion. It can therefore be concluded that the cost of implementation should be

considered before selecting an inventory valuation policy.
Table 4.22

MANAGERS SHOULD CONSIDER THE EFFECTS OF INVENTORY

VALUATION POLICIES ON REPORTED INCOME BEFORE SELECTING A

POLICY.
Frequency

Percent

STRONGLY DISAGREE

5.6

UNDECIDED

19.4

AGREE

19.4

STRONGLY AGREE

20

55.6

Total

36

100.0

Source: Field survey, 2011

Table 4.22 shows that 20 respondents representing 55.6 per cent strongly agreed
and 7 respondents representing 19.4 per cent agreed that managers should
consider the effects of inventory valuation policies on reported income before
selecting a policy. However, 2 respondents representing 5.6 per cent strongly
disagreed, while 7 respondents representing 19.4 per cent were neutral in their
opinion. It can therefore be concluded that managers should consider the effects
of inventory valuation policies on reported income before selecting a policy.
4.5

HYPOTHESES TESTING

This section tests the hypotheses developed for the purpose of this study using a
non-parametric tool called the chi-square test of independence and homogeneity
and decisions will be reached based on the findings. The analysis will be carried

65

out at 5per cent significant level and 95per cent confidence level i.e. this test
will only accommodate a maximum probability of risking a type 1 error of 0.05
while the confident level is 95per cent.
4.5.1 HYPOTHESIS I
Restatement of Hypothesis I
H0

The inventory policies available to a manufacturing company are not the

First-In-First-Out, Weighted Average and the specific identification
methods.

H1

First-In-First-Out, Weighted Average and Specific Identification are the

methods available to manufacturing companies.

Table 4.23: HYPOTHESIS I

Observed N

Expected N

Residual

SPECIFIC IDENTIFICATION

12.0

-5.0

WEIGHTED AVERAGE

12.0

-6.0

FIRST-IN-FIRST-OUT

23

12.0

11.0

Total

36

Source: Field survey, 2011

Table 4.24 Test Statistics
WHICH POLICY IS USED FOR FINISHED GOODS
15.167a

Chi-Square
Df

Asymp. Sig.

.001

Source: Field survey, 2011

a. 0 cells (.0per cent) have expected frequencies less than 5. The minimum expected
cell frequency is 12.0. The tabulated value at 5per cent significance is 5.99.

66

From the above result, the calculated value is greater than the tabulated value
i.e. the calculated value of 15.167 is greater than the tabulated value of 5.99.
Here the null hypothesis should be rejected and the alternative hypothesis that
states that First-In-First-Out, Weighted Average and Specific Identification are
the methods available to manufacturing companies should be accepted.
Conclusion: First-In-First-Out, Weighted Average and Specific Identification
are the methods available to manufacturing companies.
4.5.2 HYPOTHESIS II
Restatement of Hypothesis II
H0

There is no relationship between the inventory valuation policy used by a

manufacturing company and its reported income.

H1

The reported income of a manufacturing company affects its selection of

an inventory valuation policy.

Table 4.25: HYPOTHESIS II

Observed N

Expected N

Residual

STRONGLY DISAGREE

9.0

-8.0

UNDECIDED

9.0

-4.0

AGREE

10

9.0

1.0

STRONGLY AGREE

20

9.0

11.0

Total

36

Source: Field survey, 2011

67

Table 4.26: Test Statistics

INVENTORY POLICIES AFFECT REPORTED INCOME
a

Chi-Square

22.444

Df

Asymp. Sig.

.000

Source: Field survey, 2011

a. 0 cells (.0per cent) have expected frequencies less than 5. The minimum expected cell
frequency is 9.0. The tabulated value at 5per cent significance is 7.82.

From the above result, the calculated value is greater than the tabulated value
i.e. the calculated value of 22.444 is greater than the tabulated value of 7.82.
Here the null hypothesis should be rejected and the alternative hypotheses that
state that The reported income of a manufacturing company affects its
selection of an inventory valuation policy should be accepted.
Conclusion: The reported income of a manufacturing company affects its
selection of an inventory valuation policy.
4.5.3 HYPOTHESIS III
Restatement of Hypothesis III
H0

There is no relationship between the inventory valuation policy used by a

manufacturing company and its tax liability.

H1

The tax liability of a manufacturing company affects its selection of an

inventory valuation policy.

68

Table 4.27
Observed N

Expected N

Residual

DISAGREE

12.0

-11.0

AGREE

24

12.0

12.0

STRONGLY AGREE

11

12.0

-1.0

Total

36

Source: Field survey, 2011

Table 4.28: Test Statistics

TAX LIABILITY SHOULD BE CONSIDERED BEFORE INVENTORY VALUATION
22.167a

Chi-Square
Df

Asymp. Sig.

.000

Source: Field survey, 2011

a. 0 cells (.0per cent) have expected frequencies less than 5. The minimum expected cell
frequency is 12.0. The tabulated value at 5per cent significance is 5.99.

From the above result, the calculated value is greater than the tabulated value
i.e. the calculated value of 22.167 is greater than the tabulated value of 5.99
Here the null hypothesis should be rejected and the alternative hypotheses that
state that The tax liability of a manufacturing company affects its selection of
an inventory valuation policy should be accepted.
Conclusion: The tax liability of a manufacturing company affects its selection
of an inventory valuation policy.

69

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.0

INTRODUCTION

This chapter summarizes the findings of the study and also makes deductions
from those findings. It also makes recommendations based on the deductions
derived from the study.
5.1

SUMMARY

This study was carried out to achieve the objectives developed for the purpose
of the study. In order to achieve the stated objective of investigating the
inventory valuation policies employed by manufacturing companies in Lagos
State and providing answers to the research questions and hypotheses, a survey
instrument (questionnaire) was administered on respondents to generate and
examine their opinions. The study also sought to establish a relationship
between inventory valuation policies and the reported incomes of the
companies. In doing this, several literatures were reviewed for the purpose of
the study and findings revealed that extensive study have been conducted in
many countries into the effects of inventory valuation policies and their effects.
These literatures, alongside the findings in this study, revealed that inventory
valuation policies have a significant effect on the companies where they are put
to use. Studies also revealed that the financial characteristics of the company,
70

the types of inventory it manages, the tax savings/liability derivable, and its
reported income are all factors that must be considered in the selection of an
inventory valuation policy.
5.2

CONCLUSION

This study examined the perceptions of store managers and financial officers of
manufacturing companies in Lagos state regarding the choice of inventory
valuation policies and the factors to be considered in the source of making such
a decision.
The study found that the awareness of inventory valuation policies and their
effects on companies is too low in Nigeria. It also found that the use of
inventory valuation policies affects the reported incomes of the companies.
Furthermore, the study revealed that the knowledge of inventory valuation
policies and their effects is of critical value to Nigerian investors and
shareholders of companies, and that the knowledge of these policies and their
effects will enhance an investors evaluation of a company.
Finally, the findings of the study also revealed that the nature of inventory
managed by a company, its tax savings/liability derivable, and its reported
income are factors that should be considered by a manager when selecting an
inventory valuation policy.

71

5.3

RECOMMENDATIONS

Several strategies can be employed to improve the present situation, some of

which are mentioned below.
Firstly, the Institute of Chartered Accountants of Nigeria (ICAN) should
educate the stakeholders on the effects of inventory valuation policies and their
effects on companies through mass communication, public lectures, national
dailies and other mass media.
Secondly the government and the Securities and Exchange Council should
ensure that proper disclosure of inventory valuation policies is carried out by
manufacturing companies to improve the quality of financial reporting and to
ensure transparency in a companys financial statement.
Finally, the tax authorities should be properly educated on the effects of
inventory valuation policies so that they can determine more accurately what
the true income of companies are, and be able to charge the incomes to tax
accordingly.

72

BIBLIOGRAPHY
Adeyemi S. L. and Salami A. O. (2010) Inventory Management: A Tool of
Optimizing Resources in a Manufacturing Industry. A Case Study of
Coca-Cola Bottling Company, Ilorin Plant, Journal of Social Sciences,
Vol. 23(2); pp. 135-142.
Ball, R. (1972) Changes in Accounting Techniques and Stock Prices, Journal
of Accounting Research, Vol. No. 10, pp. 1-38
Banerjee, B. (2006) Cost Accounting Theory and Practice (12th ed.); India:
PHI Learning Pvt. Ltd.
Bar-Yosef, S. and Sen, P. K. (1992) On Optimal Choice of Inventory
Accounting Method The Accounting Review, Vol. 67(2), pp. 320-336.
Retrieved from http://www.jstor.org/stable/247727 on 25/08/2011.
Carnes, G.A. and Englebrecht, T.D. (1992) The Internal Revenue Service's
increasing power with the clear reflection of income standard Tax
Executive, Vol. 6, pp. 1-8. Accessed from
http://findarticles.com/p/articles/mi_m6552/is_n6_44/ai_13096933/pg_3
/?tag=content;col1 on 10/08/2011.
Chung, S. and Narasimhan, R. (2003) An Empirical Analysis of the Inventory
Methods OF U.S. Multinational Companies: Segment effects. Paper
presented at the Seventh International Conference on Global Business
and Economic Development, Bangkok, Thailand; January, 2003.
Cushing, B. E. and LeClere, M. J. (1992) Evidence on the determinants of
Inventory Accounting Policy Choice The Accounting Review, Vol.
67(2), pp. 355-366.
Day, R.G. (2000) UK Accounting Regulation: An Historical Perspective
Being Working Paper No. 20 in the Working Paper series presented in
the School of Finance and Law, Bournemouth university, Dorset,
London.
Ibarra, V. (2008) Choice of inventory costing method of selected companies in
the Philippines. Journal of International Business Research, Vol.
7(1), pp.1-8.
Knight R.F., Affleck-graves J.F. and Hamman W.D. (1985) The Effect of
Inventory Valuation Methods on Share Prices: Some New Evidence for
the JSE. Investment Analysts Journal, Vol. 26, 45-47.

73

Schroeder R.G., Clark M.W. and Cathey J.M. (2010) Financial Accounting
Theory and Analysis: Text and Cases; New York: John Wiley & Sons.
Sunder, S. (1973) Relationship between Accounting Changes and Stock Prices:
Problems of Measurement and Some Empirical Evidence, Journal of
Accounting Research, Vol. No. 11; pp. 1-45

74

APPENDIX
Department of Accounting,
Faculty of Business Administration
University of Lagos
Akoka-Yaba
16th September, 2011.

Dear Sir/Ma,

REQUEST TO FILL QUESTIONNAIRE ON INVENTORY

VALUATION POLICIES
I am a final year student of the above named institution. Presently, I am carrying
out a research study titled An Appraisal of Inventory Valuation Techniques
in Practice; A Case Study of Companies in Lagos State, in partial fulfilment
of the award of a B.Sc. degree in Accounting by the University.
In this regard, kindly assist by filling the attached questionnaire. Your honest
opinions are considered helpful in completing this questionnaire. You are
assured that the opinions you provide will be treated as confidential.
Thank you for your kind cooperation.
Yours faithfully,

Ibidapo D.I (Miss)

75

SECTION A: BIODATA
Instruction: Please tick [] in the appropriate box as provided.
1. Sex:

Male [

Female [

2. Age:

Under 21 years[

21-30[

40 years and above [

]
]

31-35[

36-40[

M.Sc. [ ]

Ph.D. [

3. Educational background:
SSCE/OND [ ]

B.Sc./HND [ ]

Others (please specify)..

4. Area of specialization: Accounting/Finance [

Stores management [

Others (please specify).

SECTION B
5. Please indicate the industry your company belongs to:
Breweries [
Food [

]Building materials [

Textiles [

Healthcare [

Chemicals & Paints [ ]

Manufacturing & Industrial [

6. Are you familiar with the word inventory?

Yes [

No[ ]

7. If yes, kindly indicate the categories of inventory that you are familiar with (you may
pick more than one):
Raw Materials inventory [

] Work-in-progress inventory [

Finished goods inventory [

8. Kindly indicate categories of inventory you manage in your company:

Raw Materials inventory [

] Work-in-progress inventory [

Finished goods inventory [

9. Are you familiar with any inventory valuation policies?

Yes[

] No[

10. If yes, which of these policies are you familiar with (you may tick more than one
option, please):
First-In-First-Out (FIFO) [
Specific Identification [

Weighted Average [

76

11. Do these policies have any effects on the appraisal of your companys financial
performance? Yes [

No [

12. Please indicate the aspects of this appraisal that these policies affect (you may tick
more than one option):
Computation of cost of goods sold and gross profit [
income [

computation of tax liability [

computation of reported

13. Which of these inventory valuation policies is used for the finished goods inventory of
your company?
First-In-First-Out (FIFO) [
Specific Identification [

Weighted Average [

14. Kindly state the reasons why your company is using this inventory valuation policy:

15. Are your reasons related to any of the following (you may pick more than one)
Effects on cost of sales and gross profit

[ ]

Effects on reported income

[ ]

Effects on tax liability

[ ]

Costs of implementation

[ ]

Nature of inventory managed

[ ]
PART C

Instruction: please indicate the extent to which you agree or disagree with the following
statements by ticking in the appropriate column
Key: Strongly Agree [SA] Agree [A] Undecided [U] Disagree [D] Strongly Disagree [SD]
S/N
16

ITEM

SA

The awareness of the effects of inventory valuation

policies is too low in Nigeria.

77

SD

17

The knowledge of inventory valuation policies and

their effects is of critical value to investors and
shareholders.

18

The use of inventory valuation policies affects the

reported incomes of manufacturing companies.

19

Managers should consider the effects of inventory

valuation policies on their tax liability before selecting
a policy.

20

The nature of inventory managed should be considered

before selecting an inventory valuation policy.

21

The knowledge of inventory valuation policies and

their effects on reported income will enhance the
investors evaluation of the company.

22

The cost of implementation should be considered

before selecting an inventory valuation policy.

23

Managers should consider the effects of inventory

valuation policies on reported income before selecting
a policy.

24.

Please make recommendations that will enhance the managers choice of inventory
valuation policies.

Thank you for your cooperation.

78