As the correct selection of stock valuation will affect the calculation of gross profit and ultimately the net income, we should understand the rationale for some enterprise to choose the type of stock valuation method.
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FACTORS TO CONSIDER IN THE SELECTION OF STOCK VALUATION:
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- Tradition-Certain trade or industry has its own particular method of valuing stock
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- Taxation-As mentioned, stock valuation has a direct impact on profitability. Hence, some enterprise might choose the method that can produce the lowest profitability to enjoy lower tax payable.
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- Convenience– it is always important to consider the pros and cons of costs over benefit. Weigh the cost of processing information versus costs of obtaining it.
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- Audit recommendation-Quite a number of enterprises adopted a certain stock valuation basis mainly because of the recommendation from their auditors.
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- To strength the financial position of the balance sheet. The following impact can results from a higher stock valuation:
– effectively increase the current ratio (current assets/current liabilities) to show a higher liquidity ratio;
– enable a higher capacity to borrow from lenders;
– to increase the future selling price of the business if the owner choose to sell off
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- Manipulation by senior management– by increasing stock valuation, they are able to achieve their goals set by the shareholders to remunerate them.
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- More simply, there might be an element of enterprise lacking the proper information or ignorance of the various types of stock valuation methodologies.
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