Author : Lance Thorington

There are a few different ways in which inventory valuation can be taken The most common are the first in first out (FIFO), last in first out (LIFO), moving average, and weighted average and dollar value last in first out There are many types of inventory that can be valued such as raw materials, work in process, finished goods and other inventory Valuation can be applied by individual items, categories or on totals

It can be difficult to place a value on inventory as the cost of either buying inventory or making inventory changes quite frequently Most inventory valuations will be very good estimates do to the every changing market Inventory value is shown in at least two places in the company, on the assets section of the balance sheet and on the income statement as cost of goods sold

FIFO is based upon the products that are first in will sell first So the cost of the item is based on the earliest bought material and the inventory is actually based on the cost of materials bought later in the year This actually means that the inventory is based upon replacement costs for that item FIFO is used during high inflation periods as it produces the lowest estimation for sold goods and the highest net income

LIFO is based upon the cost of inventory bought towards the end of the period, so all cost are based on current prices However the inventory is based on the cost o f material purchased earlier in that period (Basically this is the opposite of FIFO) The LIFO results in the lowest net income with the highest estimation of costs during periods of inflation

Weighted averages are based on the average cost of units throughout the inventory period When inventory moves rapidly then the weighted average method will closely resemble either the FIFO or LIFO methods There are additionally methods used for inventory valuation but the above three are the most common

The average cost methods takes the average of what was paid for the entire inventory and then calculates a unit price for all of your items Companies that manufacture their own products may not use these methods as it can become very complex Specific identification assigns each item its own unique identifier So you can look up the exact price of the 97th item sold This method is very popular for companies that sell high priced goods, as they are easier to keep track of, car dealerships are a great example

When looking at a companies inventory valuation you should pay specific attention to the footnotes as they frequently contain a lot of important information about inventory valuation Information you should expect to see is valuation method used, effects of LCM on inventory and more You should try to understand why the company used the particular method it did and if they are using this method to hid any information

It can be difficult to compare inventory, as it will depend on the method used Each company tends to use different methods that will also change depending on the strength of the dollar Companies will also change the method they use for inventory valuation to receive tax benefits

Lance Thorington is a passionate writer and online publisher. Click here to read more about inventory valuation and how to do it professionally. Visit http://www.collateralevaluation.com/appraisal-services/inventory-valuations.html

Filed under: Wealth Method

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