Inventory is the goods meant for sale as well as unsold goods. It includes raw materials, finished goods, and semi-finished goods. Inventory valuation is performed at the end of each financial year for calculating the cost of unsold inventory and cost of goods sold. It is vital as the shortage or excess of inventory impacts the profitability and production of a business. Inventory costing is an accounting concept, which impacts your gross profit and taxable income directly.

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How is Inventory Valued?

The method to value inventory depends on the way the stock is tracked over time by a business. Businesses should value inventory at cost. As inventory is being sold and restocked constantly and the price is changing constantly, businesses should make a cost flow assumption, which it shall use. Generally, there are four commonly accepted methods to value inventory including FIFO, LIFO, Weight Average, and Specific Identification. However, there are uncommon inventory costing methods, which though not approved by GAAP are useful to make a comparison. Selecting these methods can smoothen your taxable income and gross profit.

Inventory Control Techniques

HIFO (Highest in, First out)

HIFO is an inventory control accounting method wherein the inventory having the highest cost is used first and taken from stock. Companies that select this method want to reduce their taxable income for a time period. The inventory recorded as used is the most expensive one, the company shall always record the maximum COGS or cost of goods sold.

LOFO (Lowest in, First Out)

LOFO is a highly versatile and simple inventory control method. It means the materials or reserves having low purchase prices are first consumed. In the end, the reserves with high purchase prices remain. This method is used mostly in transportation and logistics, production logistics, warehouse management, inventory pricing, and requirements management

FEFO (First expired, first-out)

FEFO is an inventory control method to deal with perishable products and those have an expiry date beginning at the warehouse and ending at the store. The sell-date or expiry of a product triggers its valuation method. It allows you guaranteed quality that results in the benefit of customer satisfaction and promoting reputation.

Retail Inventory Method

Retailers use the retail inventory method to resell merchandise for estimating the end inventory balances. It is based on the relationship between the retail price and the cost of the merchandise. This method is an estimate and must be supplemented periodically by physical inventory count. It is an easy and quick method to find out the inventory balance.

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