Overview

Accurate item valuation is a cornerstone of effective inventory management. It ensures that your financial statements reflect the true value of your stock, which is crucial for profitability analysis, tax reporting, and decision-making. iVendNext provides robust tools for setting up and managing item valuation, allowing businesses to choose between different valuation methods and update stock values through various transactions. This article will guide you through the process of setting up item valuation, the types of transactions that impact valuation, and how to manage them effectively.

Note: Valuation Method can be set globally for all the items from the Stock Settings.

What is Item Valuation?

Item Valuation refers to the process of assigning a monetary value to the items in your inventory. This value is used to calculate the Cost of Goods Sold (CoGS) and the value of remaining stock. The valuation method you choose (e.g., FIFO or Moving Average) determines how costs are allocated to items, which in turn impacts your financial statements and profitability.

You can also set Valuation Method in the item master, especially when a valuation method for an item is different from the default Method as seen in the following screenshot.

Setting Up Item Valuation in iVendNext

1. Choosing a Valuation Method

iVendNext allows you to set a valuation method for your items. The two primary methods are:

• FIFO (First-In, First-Out): Assumes that the oldest items in your inventory are sold first.

• Moving Average: Recalculates the average cost of an item every time a new purchase is made.

Note: You can set the valuation method globally for all items or individually for specific items.

Global Valuation Method

To set a global valuation method:

1. Navigate to Home > Stock > Stock Settings.

2. Under the Valuation Method section, select either FIFO or Moving Average.

3. Save the changes.

Item-Specific Valuation Method

To set a valuation method for a specific item:

1. Navigate to Home > Stock > Items.

2. Open the item for which you want to set the valuation method.

3. In the Valuation Method field, select either FIFO or Moving Average.

4. Save the changes.

Note: Once ledger entries are made for an item, the valuation method can no longer be changed for that item.

Transactions That Impact Item Valuation

Item valuation is updated based on specific transactions in iVendNext. Here are the key transactions that impact item valuation:

1. Purchase Receipt

A Purchase Receipt is created when goods are received from a supplier. This transaction updates the stock quantity and valuation based on the purchase price and any additional costs (e.g., shipping, customs duties).

Example:

• You purchase 10 units of an item at $100 each.

• The Purchase Receipt updates the stock quantity to 10 units and the valuation to $1,000.

2. Stock Entry (Material Receipt)

A Stock Entry of type Material Receipt is used to add items to your inventory without a purchase transaction. This is useful for internal stock transfers or adjustments.

Example:

• You transfer 5 units of an item from one warehouse to another.

• The Stock Entry updates the stock quantity and valuation in the receiving warehouse.

3. Stock Reconciliation

Stock Reconciliation is used to adjust the stock quantity and valuation, typically for correcting discrepancies or setting opening balances.

Example:

• You discover that your stock count is off by 2 units.

• You create a Stock Reconciliation to adjust the quantity and valuation accordingly.

How Item Valuation is Updated

When a transaction is created or submitted, iVendNext automatically updates the item’s valuation based on the selected valuation method (FIFO or Moving Average). Here’s how it works:

1. FIFO Valuation

• Purchase Receipt: The cost of the newly purchased items is added to the inventory.

• Sale: The cost of goods sold (CoGS) is calculated based on the oldest items in stock.

Example:

• Purchase 1: 10 units at $100 each.

• Purchase 2: 20 units at $120 each.

• Sale: 15 units.

• 10 units from Purchase 1: 10 x $100 = $1,000.

• 5 units from Purchase 2: 5 x $120 = $600.

• Total CoGS: $1,600.

• Remaining Stock: 15 units at $120 = $1,800.

2. Moving Average Valuation

• Purchase Receipt: The average cost of the item is recalculated based on the new purchase.

• Sale: The cost of goods sold (CoGS) is calculated based on the current average cost.

Example:

• Purchase 1: 10 units at $100 each. Average cost = $100.

• Purchase 2: 20 units at $120 each. New average cost = [(10 x $100) + (20 x $120)] / 30 = $113.33.

• Sale: 15 units at $113.33. CoGS = 15 x $113.33 = $1,700.

• Remaining Stock: 15 units at $113.33 = $1,700.

Practical Example: Item Valuation in Action

Scenario: Retail Store

Imagine you run a retail store and have the following transactions:

1. Purchase Receipt: You purchase 10 units of an item at $50 each. The stock quantity is updated to 10 units, and the valuation is $500.

2. Stock Entry: You transfer 5 units from another warehouse. The stock quantity increases to 15 units, and the valuation increases to $750.

3. Sale: You sell 8 units. Using FIFO, the CoGS is calculated as:

• 8 units at $50 each: 8 x $50 = $400.

• Remaining Stock: 7 units at $50 = $350.

Key Benefits of Accurate Item Valuation

• Accurate Financial Reporting: Proper item valuation ensures that your financial statements reflect the true value of your inventory.

• Improved Profitability Analysis: Understanding the true cost of items helps you set appropriate selling prices and analyze profitability.

• Compliance: Accurate valuation ensures compliance with financial and tax regulations.

Important Points to Remember

• Valuation Method Consistency: Once ledger entries are made for an item, the valuation method cannot be changed. Choose the method carefully.

• Impact of Additional Costs: Use Landed Cost Vouchers to include additional costs (e.g., shipping, customs duties) in the item’s valuation.

• Regular Reconciliation: Perform regular stock reconciliations to ensure that your stock quantities and valuations are accurate.

Conclusion

Item valuation is a critical aspect of inventory management that impacts your financial reporting, profitability, and compliance. iVendNext provides flexible tools for setting up and managing item valuation, allowing you to choose between FIFO and Moving Average methods and update stock values through various transactions. By understanding how to set up and manage item valuation, you can ensure accurate financial reporting and make informed business decisions.