Author(s): Abdulrahman Atllah Alharbi
Inventory is an important asset in a manufacturing company. The means of recording inventory value could affect various financial parameters including profits and taxes, thereby impacting the financial statement. Thus, considering the significance of inventory valuation, this research aims to understand the range of factors that influence the selection of inventory valuation methods across the manufacturing sector in Saudi Arabia. This is a rapidly growing sector throughout the country, and the government is undertaking a variety of initiatives to support it. This research focuses on 35 manufacturing companies in Saudi Arabia that were analyzed over the observation period (2016–2020). Whilst there are several factors that may have an impact on the selection of inventory valuation method, this research focuses on inventory turnover, current ratio, financial leverage, and gross profit margin, and considered two inventory valuation methods (FIFO and weighted average). Employing the case question approach, it was found that the FIFO and weighted average inventory valuation methods have varying impacts on profit, tax, and ending inventory, with a weighted average generating higher profits across manufacturing firms in Saudi Arabia. Using the Logistic regression approach, it was found that whilst the four independent variables (inventory turnover, current ratio, financial leverage, and gross profit margin) can explain only minor variability in the selection of inventory valuation method, however, they have a significant influence on the dependent variable.