Profit (or Loss) of a business is determined by matching revenue with cost. Cost, within itself as a major component, includes cost of materials consumed. Cost of goods sold determines the quantum of profit, given any sales revenue. It is hardly ever possible to manage either of two situations :
- to match supply totally synchronously with the demand for materials for the production of goods to be sold;
- continuing on (a), to ensure that nil material balance occurs at the end of any accounting period, leave alone for any particular production set up for any of the goods to be produced to be sold in the line of the business.
Company Law in India obliges management to disclose broadly the method of valuation of inventory in their balance sheets. Since 1976, auditors have even to certify on physical verification having been conducted, periodically by the management, and on any significant discrepancies noticed at such verification relative to the book records and, if any so, whether the same have been duly and property dealt with in the books of account and whether the auditor is satisfied on the whole affairs and on the consistency of the accounting and valuation principles adopted or to certify any deviations and changes adopted together with the effect thereof on valuation.
Closing inventory comprising raw materials, works-in-progress and finished goods make up to a substantial proportion of the assets of a business for the simple reason that production of goods and services these materials and inventory is the very purpose or raisin of the business. Their values as included in the balance sheet influence the judging of the financial position of the business on the date of the balance sheet. The uncertainty in such judgement or the influencing of the judgement is aggravated if no proper priced stock ledgers are maintained which, if maintained, enables proper pricing of the consumption/issue of materials and finished goods based on the chosen
assumptions as given in Section .
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