Question

Why does a company need to know how many dollars they have in inventory of their stock?

Answer 1

Inventory is valued at year end because company wants to determine exact amount of its expense incurred for production. In other terms it wants to know tha exact amount of cost of goods sold. As we know ending balance of inventory is deducted in computing the cost of goods sold. There are other impact also but they are related mainly with this reason only.

One may want to know what will happen if company don't know the value of inventory in hand. Than imagine their cost of goods sold will be wrongly computed and will either understated or overstated which will directly affect the gross profit, net profits as mentioned in Income Statement.

On the other hand we know that inventory balance is stated under current asset in balance sheet. A wrong value will lead to either understatement or overstatement of balance sheet figures.

All these affects will also leads to the voilation of Matching Principal of accounting. It states that expense of a period should be enter into the same period in which income related to such expense is recorded. If cost of goods sold will not be accurate it will lead to voilation of matching principal also.