What is the importance of understanding various inventory valuation methods
1. What is the importance of understanding various inventory valuation methods in determining the quality of reported profits?
2. Even though firms follow the accounting rules (GAAP) when presenting their financial statements, it is still possible for conflicts of interest to exist between what management wants investors and creditors to see and the economic reality of transactions. Explain how this can occur.
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Finance Accounting
Question 1
Inventory valuation is an important aspect of business considering that the inventory is usually the most important current asset of the organization. The primary reasoning is that accurate inventory valuation works to ensure that the organization is able to keep proper track of its financial statements and thus influences proper decision making at the organizational levels. Rajasekaran, (2011) points out that different organizations have different inventory valuation plans. The inventory valuation approach used is thus important in determining profitability, taxes, supply chain decisions and planning for marketing.
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