Stock value in som and dollars: reporting without confusion

Local records are kept in som, while head office looks at dollars or lira. The same warehouse is therefore quoted with several different figures. What is more, as exchange rates move, stock value shifts even when not a single carton enters the warehouse. This article explains three decisions for reporting stock value to head office without confusion: which cost, which rate, which date. The rates in this article are invented to keep the arithmetic simple; they do not show real rates.

Three decisions

• Which cost? Cost is held in the currency in which the goods were bought: imported fabric in dollars, local services in som. The report currency is applied afterwards. The choice of costing method (average, first-in first-out and so on) is the accountant's decision; a count report does not change it, only states it.
• Which rate? The source should be clear (for example the Central Bank's official rate, or the rate your accounting uses) and must not change within a report.
• Which date? The purchase date, the count date or the month end: one is chosen and written in the report.

What the cost contains should also be settled in advance: only the invoice price, or the landed cost with freight and customs added? For example, if the invoice price is 2.50 USD/m and freight and customs add 0.30 USD/m, the landed cost is 2.80 USD/m. A stock of 4,000 metres is worth 10,000 USD at invoice price and 4,000 × 2.80 = 11,200 USD at landed cost. The 1,200 USD between them looks like an unexplained value difference to anyone who does not know which definition was used. The definition must stay the same at every count.

Example: stock unchanged, value changed

An assumed rate: 1 USD = 10,000 som. The warehouse holds 4,000 metres of fabric at a purchase cost of 2.50 USD/m, worth 4,000 × 2.50 = 10,000 USD. At the purchase-date rate that is 10,000 × 10,000 = 100,000,000 som. Suppose the rate on count day is 10,400: 10,000 × 10,400 = 104,000,000 som. Not one metre has changed, yet the value in som has risen by 4,000,000 som. That is not a stock difference but an exchange-rate effect.

Now suppose the count finds 40 metres missing. The quantity difference is worth 40 × 2.50 = 100 USD. In som it comes to 100 × 10,000 = 1,000,000 som at the purchase rate and 100 × 10,400 = 1,040,000 som at the count-day rate. The 40,000 som between them comes from the rate alone; nobody has taken anything.

Show the three differences separately

The report should not mix these three things:

• quantity difference: metres, cartons, sets;
• value difference: quantity difference × unit cost;
• exchange-rate difference: the som equivalent of the same dollar value at different rates.

Let the main currency of the variance table be the currency the cost comes in (USD in the example), with the som equivalent and the rate in separate columns. When head office reads "stock rose by 4,000,000 som", it then sees at once that this is a rate effect. If conversion into lira is wanted, the same rules apply: the rate source and date are stated separately and the conversion chain runs in one direction. First find the value in the currency the cost comes in, then convert with a single rate; for example, stock of 10,000 USD at an assumed 30 TRY/USD is 300,000 TRY. Because rates keep moving, do not revalue every day; one date is enough for a count report. It is normal for the rate at the month-end close to differ; if you must put the two figures side by side, call the difference an exchange-rate effect.

The report footnote

Under every report, write these four items:

1. The currency and the type of cost.
2. The rate and its source.
3. The date of the rate.
4. Whether the same rate was used in the earlier count it is compared with.

The usual mistakes are clear too: valuing two counts at different rates and saying "stock rose", mixing cost and selling price, adding som and dollars in one column, and leaving out the date of the rate.

In short

To report stock value consistently, it is enough that cost, rate and date are written down in advance. In its head-office summary StockSystem gives the largest variances, their weight in value and the recommended actions on one page; settling the currency and rate rule together with the report layout, at the start, is the safest way.