Stock Valuation And Profitability (A Case Study Of Unilever Nigeria Plc)
The survival of a business organization depends on the degree and accuracy of keeping proper accounting records, most especially the records that determine the profit of the firm.
One of the assets of a business that calls for adequate record keeping is the current asset of stock. This is because, it constitutes the largest portion of the current assets of a company being it a trading or manufacturing concerns. Before a business starts materials, work stock either in the form of raw materials, work in progress or finished goods. Stock is therefore the principal source of revenue for any business enterprise.
Beside, the asset of stock is particularly significant because it may materially affect both the income statement and the balance sheet. To determine the net income, the cost of stock sold or produced is the largest deduction from sales, considering the importance of stock in a business; care should be taken in counting and pricing the stock at the year and since a small error in the valuation of the closing stock may have a material effect upon the net income.
The motive behind this research project therefore is to investigate with the help of discussion, questionnaires and review of related literature on how business enterprises account for their stocks, the problems confronting them and the effects of improper stock valuation on profitability with particular reference to Unilever Nigeria plc.
Table Of Contents
- Title page
- Approval page
- Table of contents
- 1.1 Background of the study
- 1.2 Statement of problem
- 1.3 Objective of the study
- 1.4 Research question
- 1.5 Statement of hypothesis
- 1.6 Significance of the study
- 1.7 Scope of the study
- 1.8 Limitation of the study
- 1.9 Definition of terms
2.0 Literature Review
- 2.1 Historical background
- 2.2 Definitions
- 2.3 Stock management
- 2.3.1 Classification of stock
- 2.3.2 Essentials of stock management
- 2.3.3 Needs for stock keeping
- 2.3.4 Stock checking and stock taking
- 2.3.5 High level of stock
- 2.4 Cost Influencing stock
- 2.4.1 Stock level classification
- 2.5 Cost flow assumption
- 2.6 Basic rules to stock valuation
- 2.7 Methods of establishing stock quantitative
- 2.8 Choosing stock costing methods
- 2.9 Effects of errors in stock valuation
- 2.10 Chapter summary
3.0 Research Methodology
- 3.1 Introduction
- 3.2 Research design
- 3.3 Source of data collection
- 3.3.1 Primary sources of data
- 3.3.2 Secondary sources of data
- 3.4 Population and sample size
- 3.5 Sample techniques
- 3.6 Validity and reliability of measuring instrument
- 3.7 Method of data analysis
4.0 Presentation and Analysis of Data
- 4.1 Introduction
- 4.2 Data presentation, classification and conclusion
- 4.3 Analysis of data according to research hypothesis
- 4.4 Analysis of data to test hypothesis
- 4.5 Interpretation of result
- 4.6 Analysis of question
5.0 Summary, Conclusion and Recommendation
- 5.1 Introduction
- 5.2 Summary
- 5.3 Recommendation
- 5.4 Areas of further study
- Appendix 1
- Appendix 11
Stock is one of the largest and most valuable current assets of any trading or manufacturing concern. They are items of value held for use or sale by a firm which include goods awaiting sales, most at times called finished goods, goods in the course of production, also called work in progress (WIP) and goods to be consumed in the course of production, called raw material. Conversely, it excludes long term assets subject to depreciation, called fixed assets and those that are subject to amortization, called intangible assets.
Nevertheless, stock of manufacturing firms constitutes the second largest item after fixed assets in the balance sheet in terms of monetary value; hence it is paramount to attach importance to the control and management of stock and its usage by the firm.
Valuation is a measurement process, hence by stock valuation, we refer to the assignment of monetary value to stock the value attached to stock at the end of every financial year would go a big was to determine the level of profitability of a firm at the particular year.
This research work therefore, centers on investigating the relationship between stock valuation and profitability and improper stock records maintenance in a firm with reference to Unilever Nigeria Plc as a study.
1.1 Background Of The Study
This study in based on Unilever Nigeria plc, which outfit is located at Aba, Abia state. It was formally known as the West Africa Soap Company Limited in 1923 initial its change to Unilever Brother’s Nigeria limited in 1955.
It first started with importing cold water detergent into counting which was white in colour with some blue greenish sparkles. In 1947, the firm introduced the OMO blue detergent which completed with cold water test. The firm started diversity its manufacturing plant which leads to the establishment of Aba Plant in 1949.
Initially, the firm manufactures scope was based on local palm oil and now they have strengthened to foot hold and drink business by merging with Lipton Nigeria Limited in product industries on December 1988 and become giant in personal production process.
In accordance with the Nigeria enterprise promotion decree of 1972 and 1977, 69 percent of the company’s equity is held by Nigerian citizens and institutions while remaining 340 percent is held by Unilever overseas holding limited Lipton Tea Company limited and chesebrough pound’s international limited.
Today, brothers Nigeria Aba as a heading company in the industrial sector, engaged in the manufacture and marketing of a wide range of households cleaning, personal washing, skin care, dental care, industrial to baking products. Through efficient and shapely focused management, the manufacturing sites have been nationalized some years ago for the current three Leading to significant saving & cost effectiveness, first “Apapa, the premier and site, procedures of soap, as sunlight, oxber, lux breeze life bury, astra and personal products close up pepsodent, Vaseline or ponds.
The second plant is devoted in the production of non soaping detergent powder and bars. Here, the company at factory road in Aba behind Nigeria breweries Aba makes such popular brands as OMO, RIM and use powder. The third and newest of all the plant commissioned in 1983, it is the ultra modern food factory in Agbara, where the company produces Royce, Blue Band Plants tree top and branding.
The company is fully committed to backward integration and self sufficiency and has made considerable progress in the company that has build a large palm kernel will at its Aba factory to improve its local sources.
Unilever Nigeria plc’s range of quality products is distributed and sold at uniform price cell over the country through an established and tested distribution network using appointed distribution, supervised and well trained sales fire. The company has direct staff strength of 2,224 employees in its three factories and various distribution points throughout the country; of this number, only six are expatriate.
This is the extent which the company has gone at training and development local management resources. The objective is to bring in expatriate to give the business an international flavor and in exchange for its own managers going overseas to work and obtain foreign experience rather than as a matter of necessity. The company also provides employment for over 6000 supplies and distributors who in turn employ thousands of people.
Unilever Nigeria Plc has been dedicated to the production to top quality brand for Nigeria for over 70 years with over 30 strength in Aba plant, with these, there super brand remain a must in every home.
1.2 Statements Of Problem
The validity of stock and work in progress affects the true and fair view of the profit and loss account as well as the balance sheet. Surprisingly many enterprises are ignorant of these facts. Some enterprises too, who are aware of this fact in most cases over look it. These enterprises and up recording understated or overstated stock value and profit in their financial statement.
The problem of understated or overstated profit or net income could be attributed to one of the common financial statement fraud known as inventory fraud. This problem is sufficiently severe and therefore calls for serious attention. Inventory fraud for instance has tempted many firm and fooled more auditors. Even auditors at the top allowing firms are often fooled. It is a quick way to paid profits and is often revealed only when concern collapses.
When companies are desperate to stay afloat, inventory fraud is the easiest way to produce instant profits and dress up the balance sheet. Some small businesses purposely have understated ending inventory, in their income tax returns as an easy through fraudulent means of understanding taxable income.
This research project is therefore designed to address the above problem, be examining closely in effect of improper stock valuation on profitability and emphasizes on the need for proper stock valuation.
1.3 Objectives Of The Study
Companies believe that the more efficient and productivity, they become under such conditions. This study aimed at:
- To find out the problem of inventory facing management of manufacturing firms.
- To find out if these problems can be prevented or minimized.
- The study will also ascertain the level of challenges they face in the course of taking inventory.
- The study also x-rays the prospects of inventory in the manufacturing firms.
- The study will proffers some recommendations on way forward to achieving good inventories in manufacturing firms.
- To know what causes the problem in the company. The researcher embarks on this research work to recommend avenues for solving those problems to enhance productivity.
1.4 Research Question / Hypothesis
In order to facilitate an easy approach to the study, the following research question and hypothesis were formulate.
1.5 Research Que4stion
- Is there any significant relationship between method of stock valuation and the level of profit reported by business organization?
- Is there any significant relationship between the valuation of the closing inventory and the amount of profit recorded by business organization?
- Is proper stocktaking and valuation needed for a true and fair view of the state of affairs of an undertaking?
- Is accurate and up-to-date record, required for effective stock control?
- Ho: there is no significant relationship between stock valuation and profitability.
- Hi: there is a significant relationship between stock valuation and profitability.
- Ho: Improper stock valuation is not one of the factors responsible for understated or overstated profits in business organizations.
- Hi: improper stock valuation is one of the factors responsible for understated and overstated profits in business organization.
1.6 Significance Of The Study
This study will find some useful information regarding the problems of Unilever Nigeria Plc, Aba with their effect and hence, the solution that will lead to increase in efficiency and productivity in the accounting department.
Information gained from the study could be used by management of Unilever and any other similar organizations for their planning and execution of appropriate motivation package for its accounting department.
1.7 Scope Of The Study
The researcher is concerned with the problems and prospects in Unilever Nigeria Plc and how these problems affect the efficiency and productivity in the accounting department. The study is based only in accounting department at Aba.
1.8 Limitations Of The Study
Every work while ventures have some problems militating against its progress. This study is not exception collecting information required for the research was not an easy task due to suspicious. Non – challant attitude towards respondent.
Some respondents were very un-cooperative and unwilling to help some entertained fear victimization for disclosing information despite all explanation and assurance to treat it with utmost confidence. No source of finance and the problem were more complex. The transportation problems compounded with bad roads which sky reacted the transport fairs.
There should be worth of mention that a study of this requires a lot of patience and persistence. Despite all these mentioned, it is not worthy that the researcher made that this study has researchable degree of reliability.
1.9 Definition Of Terms
For better and easy understanding of the study, the following terms were used in the content of this research:
This is current assets items held for sales in an ordinary course of business i.e. material used in production of other goods and devices which are meant for sales.
These are goods a trading or manufacturing company sells to its customers. These are goods acquired in a finished condition, which are ready for sale without any further processing.
This is the financial gain which arises from the trading or business transaction; it is an increase in wealth. It is the excess of sales revenue over cost or expenditure.
this is the exchange of goods for money. It is the goods sold to customer within the period of account.
These are items which can be easily be converted into cash within an operating cycle without interfering the normal business operation.
This is a measurement process which demonstrates its usefulness and worth.
This is an input to be converted into finished products. It is a material produced either a natural as manufactured condition.
These are fully manufactured products awaiting for dispatch for consumption.
These are form engage into the process of production on a large scales of goods.
These are the mechanism involve on the corporate discussion making of a firm by seeing the smooth running of the organization in order to achieve its goals.
These are partially manufacture goods which are held in intermediate stage of completion and require further processing before distribution.
This is a situation that pertains when the balance of the physical stock of a particular commodity has been used and none remains in store.
This is the valuation of stocks of raw materials work in progress and finished goods. Stocks are values at the lower of cost or net realizable and the costs incurred up to the stage of production reached i.e. production process should include both fixed and variable production cost (statement of standard accounting practice 9)
This is additional unit of stock above the minimum number requires to maintain production level.
True And Fair View:
This simply means that items in the accounts (financial statement) do not mislead when taken individually or collectively. This term is used to describe statements that are prepared within the acceptable parameters (GAAPs).
This is the stock held by a firm at the beginning of an accounting period as raw material, work in progress or finished goods. The closing stocks of one period become the opening stock of the succeeding period.
5.0 Summary, Conclusion And Recommendation
This chapter is designed to summarized, conclude or cognate points and supply some recommendations based on the data analysis in the preceding chapter.
In the course of the analysis in chapter four in this study, the following were discovered.
- The company uses the perpetual inventory method of stocking in ascertaining the quantity of stock at hand, this was shown by 100% response in favour of the method.
- The company uses more than one method of stock valuation. With the FIFO method being the most widely used method. The company’s use of different methods is justified on the ground that the company is not required to use the same inventory costing method for all inventory items.
- The company is consistent in applying the stock valuation methods. Although changes in method exist such changes are done on a consistent bases and are considered necessary when there is need to improve the measurement of financial results and performance.
- It is also discovered that the company’s internal control system with regards to stock is adequate to some extent.
- It was discovered that although the problem of understated and overstated profit is rare in the company, it is not completely absent, this was evidenced by a 28% response in support of the fact that the company overstated its profit in 2012.
- It was also discovered that improper stock valuation and control is one of the factors responsible for overstated profit in business organization. This was shown by 100% response.
Based on the above information obtained, from the questionnaire analysis in chapter four, the following conclusion can be drawn.
- The company has made commendable effort to ensure efficient control and valuation of its stock by putting in place adequate stock control and procedures.
- The stocking and valuation method adopted is justified by the large size of the company and numerous number of inventory items it produces respectively.
- The problem of overstated and understated profit is not only applicable to small business enterprise. It is also applicable to public in business organizations.
With respect to the above information and conclusions, the following recommendations are made for implementation.
- The company should see stock valuation as a very important aspect of the business and should recruit qualified and reputable accounting staffs for the work in order to ensure proper measurement of financial results and health of the company.
- Adequate stock records should be kept to monitor the use of stock so as to know when to order for replacement and also adequately account for the quantity received or issued. Stock card should be kept for each inventory item used in the enterprise.
- Sound internal checks should be maintained with regards to stock in order to detect fraud or errors such internal checks should include:
- Segregation of functions so that each person is made responsible for one area and that no one has control over a complete range of functions such as placing orders making issue and posting to ledgers etc.
- Occasionally, physical and book figures of stock be closed and discrepancies reconciled.
- Proper positions of authority should be clear concerning the preparation and passing of invoices authorization and approved of expenditure, singing of cheques, handling of cash and materials and other important functions in the organization in which carelessness can easily lead to loss of fund.
5.4 Areas For Further Study:
Based on the findings, conclusion and the recommendations the following suggestions for further studies are made:
- A study on other factors that could lead to overstated and understated profit in business organization should be carried out.
- Comparative effectiveness of the stock valuation and control of two or more organizations should be carried out.
- A study on inventory management and control should be researched.
- A study involving a larger population should be carried out to strengthen the validity of the study that is instead of using just one branch of the company, more branches should be visited.
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