Stock value changes the profit
Inventory is shown as an asset, but it also changes margin and profit. If quantities are correct but costs are wrong, management may believe a product is profitable when it is not. The reverse can also happen: a product may look weak because the cost method is badly applied.
For an Algerian SME, stock valuation should be documented before the closing work starts. It is not a technical setting to choose at the end of the year.
What the Algerian SCF requires
The Algerian financial accounting system, SCF, treats inventories as assets held for sale in the ordinary course of business, in production, or consumed in production or services. Classification depends on how the item is used by the business.
Inventory cost normally includes the costs needed to bring the stock to its present location and condition: purchase cost, conversion cost and directly attributable costs. Transport, insurance or approach costs can therefore affect valuation when they are directly linked to the stock.
At inventory date, stock should not be carried above what can reasonably be recovered. Damaged, obsolete or slow-moving items may require an impairment review.
Weighted average and FIFO, not LIFO as a shortcut
For interchangeable goods, the practical methods to discuss for Algerian SCF work are weighted average cost and first-in, first-out (FIFO, also called PEPS in French practice). LIFO should not be used as a normal Algerian stock valuation argument unless the accountant has a documented basis under the applicable framework.
Weighted average cost smooths purchase price changes. After a receipt, the average unit cost is recalculated using the existing value and the new entry value. This is often practical for SMEs with many similar items.
FIFO assumes that the first units received are the first units issued. It can fit products with natural rotation, lots or dates. It requires a clean movement history.
Simple example
A company buys 10 units at 1,000 DA, then 10 units at 1,300 DA. It later sells 8 units. Under FIFO, the first 8 units leave at 1,000 DA. Under weighted average, the average cost is 1,150 DA before the sale.
The method should not be changed to improve a margin on paper. It should match the way the company works and remain stable.
Frequent mistakes
Most valuation errors come from data, not from the formula:
- provisional receipt prices are never corrected;
- purchase costs are ignored or counted twice;
- supplier returns do not update cost;
- credit notes are treated outside inventory;
- negative stock distorts average cost;
- the same item exists under two codes;
- physical inventory adjusts quantity but not value;
- obsolete stock remains at full cost.
Good inventory software in Algeria should expose these points before the period is closed.
Link with physical inventory
The physical inventory confirms quantities. Valuation gives those quantities a defendable amount. Both must be reviewed together. A difference of two units on an item worth 200 DA is not the same risk as two units on an item worth 300,000 DA.
The closing report should list zero-cost items, abnormal costs, negative stock, dormant stock and material differences. These exception lists are more useful than a single total with no explanation.
Link with accounting and tax
Stock valuation affects financial statements. For companies subject to IBS, taxable profit starts from accounting profit and then applies tax adjustments. Weak valuation therefore creates a management risk and a tax-reading risk.
Inventory should also stay coherent with purchases, sales, VAT, supplier credit notes and closing documents.
Official references
- SCF implementing order, inventories and accounts
- Law 07-11 on the Algerian financial accounting system
- Algerian DGI - IBS and taxable result
FAQ
Can the valuation method change during the year?
Only with a serious accounting reason and proper documentation. Changing method only to improve margin makes the valuation hard to defend.
Why does weighted average become inconsistent?
Usually because of a wrong receipt price, a late supplier return, negative stock or inconsistent units of measure.
Is the last purchase price enough?
No. It can help commercial analysis, but it does not replace a documented accounting valuation method.
Closing rule
Stock valuation connects warehouse work, purchasing, sales and accounting. A clear method makes margin readable. A weak method turns inventory into a number nobody can defend.