Inventory has to be properly valued because of the following reasons:

(i) Determination of income. The valuation of inventory is necessary for determining the ne income earned by a business during a particular period. Gross profit is the excess of sales over cost of goods sold. Cost of goods sold is ascertained by adding opening inventory to and deducting closing inventory from purchases.

(ii) Determination of financial position. The inventory at the end of a period is to be shown as a current asset in the balance sheet of the business. In ease the inventory is not properly valued, the balance sheet will not disclose the correct financial position of the business.