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Valuation of Inventory / Stocks and Debtors / Receivables

Currently, there has been a spate of mergers and acquisitions, significant private equity investments, reforms in taxation laws, higher use of principle of fair value in accounting standards, etc. necessitating the need for determining the value of the Inventory / Stocks and Debtors / Receivables so transferred.

Inventories are assets:

  • Finished goods in ordinary course of business;
  • in the process of production for such sale; or
  • in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventory valuation is the monetary amount associated with the goods in the inventory. The valuation is based on the costs incurred to acquire the inventory and get it ready for sale. While valuing Inventory/Stocks, due allowance/adjustment should be made for any obsolete, unusable or unmarketable stocks held by the organization.

Accounts receivable: A receivable shall be classified as a “trade receivable” if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.

Debtors may constitute a significant proportion of the total assets of an entity. While valuing Debtors/Receivables, appropriate allowance/adjustment should be made for ageing, any bad debts and debts which are doubtful of recovery.

Valuations of financial assets are playing an increasing central role in investment decisions as well as risk assessments. There are established approaches for valuation. At RBSA, we help companies select the most appropriate approach and estimate all required parameters.

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