Inventory Valuation refers to the method used to assign a monetary value to the inventory a company holds at the end of a reporting period.
This process is critical for accurately reflecting a company’s financial position and involves several methods, including:
-
First-In, First-Out (FIFO): Assumes that the oldest inventory items are sold first. This method can lead to higher profits during inflationary periods since older, cheaper costs are matched against current revenues.
-
Last-In, First-Out (LIFO): Assumes that the most recently acquired inventory items are sold first. This method may reduce taxable income during inflation since it matches newer, higher costs against revenues.
-
Weighted Average Cost: Calculates an average cost for all inventory items available for sale during the period and uses this average to determine the cost of goods sold and ending inventory.
Accurate inventory valuation is essential for financial reporting, tax calculations, and assessing profitability, impacting key financial ratios and business decisions.
« Back to Glossary Index