Stock Valuation and Verification

There is a distinct difference between the two terms "valuation" and "verification". Valuation is the monetary equivalent of the stock or material in hand whereas verification is the determination or quantification of the material in stock and checking its deviation from the figures shown in the books. 

Valuation becomes necessary to assess the assets of the company for sale, determining insurance cover to be taken, during acquisition and mergers, get an idea about the difference between book and actual depreciation etc. Since the procurement price or sale price of a material does not remain constant, it is necessary to valuate the stocks regularly or during specific occasions. For example, if the price of an item in inventory which is required for producing something has gone up during its storage period, selling it by basing its selling price on the past purchase price can mean lesser margins. Similarly, if the price has gone down during the stocking period, selling it at a higher price can mean being outpriced by competition. 

Since valuation methods can increase or decrease assets, companies occasionally resort to manipulating the valuation methods to present rosy or drastic pictures as the case may be. For instance, the gross profit is the difference between net sales and costs of production. Since materials cost is a part of production, the valuation basis can determine whether the company is going to have profits or losses. Frequent unauthorised changes are illegal. Under the companies act, a change in the method of valuation has to be approved by the Board of Directors of the company and must be reported alongwith the effect of changes in the profitability due to the changes in method of valuation duly certified by the auditors.