The Importance Of Correct Stock Valuation as it has great impact On Gross Margin,Net Income , Asset Valuation And Capital of a business(Part 8)

July 3rd, 2006 Comments off
Share |

It is important to understand the reason for the need to have correct valuation of stock.

Simply, any incorrect stock valuation will have direct impact on the gross margin of an enterprise leading right down to the bottom-line which is the net income/profit of an enterprise.

As the closing stock is in the current asset of the balance sheet, any overstatement or understatement will again overvalue the overall assets of the balance sheet. 

Based on the accounting equation concept ( Assets= Liabilities + Equity), this overvaluation of the stocks will lead to increase in owners’ equity.

Let’s look at the below illustration where the closing stock is overvalued from $1,000 to $3,000.


OVER-STATE  Stock Valuation
CORRECT  Stock  Valuation
Difference/  Impact
Revenues
10,000
10,000

Cost of Goods Sold:



Purchases
5,000
5,000

Less :Closing Stock
3,000
1,000
Wrong/Over-valuation of Stock by $2,000
Cost of Goods Sold:
2,000
4,000

Gross Profit Margin
8,000
6,000
2,000(Increase)
Less: Overheads
5,000
5,000

Net Income/Profit
3,000
1,000
2,000(Increase)




Capital , End of Period


2,000(Increase)
Stock, End of Period
3,000
1,000
2,000(Increase)

Comments are closed now.

Financial Accounting

 
 

Advertise Here | Brain Teasers/Puzzles | Greeting Cards | Inspirational Quotes | Jokes/Humor | Useful Links | Motivational Stories | Resource | Shopping | Share/Express Your Views | Testimonials | Universities/Colleges | Words of Wisdom from Religions | FREE POSTING OF ACCOUNTING & FINANCE JOBS VACANCY|