In Section VIII of this book we hinted at the problems associated with the maintenance of inventories and in this connection it is convenient to consider the maintenance of total inventories. Suppose in the first instance that inventories expressed in quantities are increased over the period of account. Then in order to see the effect of this inventory change on the measurement of profit it would be virtually necessary to value the quantitative increase at or near to last cost. As a consequence of this procedure the closing credit for inventory valuation in the operating account would be equivalent to the amount of the opening debit plus the quantitative increase at last cost.

If we suppose in the second instance that inventories expressed in quantities have decreased over the period of account, then since there is no quantitative increase there will be no addition to value at last cost, and the whole of the closing inventory will remain valued at what we may call the first cost represented by the basis of valuation of the opening inventory. In this case, however, since there has been a fall in quantities it may be necessary to provide for an operating item which takes care of the difference between the first or opening and last or closing costs on the quantitative decrease. The purpose of this adjustment is to safeguard the financial ability of the enterprise to restore the quantitative amount of its opening inventory. When this restoration is carried out the replacement provision then standing in the balance sheet will fall to be dealt with as a capital surplus adjustment. Although there may appear to be an asymmetry of treatment between the methods adopted in the two situations it will really be seen that each method has the same net effect on the operating account, and is equivalent to controlling opening and closing inventories at last cost so far as this net effect is concerned. In either case the difference between the closing and the opening inventories plus or minus the operating entry introduced in the case of falling inventories, is equivalent to the change in the quantities valued at last cost.