Inventory Valuation
Definition
Determining the monetary value of stock on hand, which sets both the balance-sheet asset and cost of goods sold. The method chosen, FIFO, LIFO or weighted average, changes reported profit when input prices move, so it must be applied consistently.
Related Terms in Purchasing & Inventory
LIFO (Last In, First Out)
An inventory costing method that charges the most recently purchased stock to cost of sales first. In a rising-price environment it reports higher cost of sales and lower profit than FIFO. Permitted under US GAAP but prohibited under IFRS.
Weighted Average Cost
An inventory method valuing every unit at the average cost of all units available, recalculated as new stock arrives. It smooths the effect of price volatility and is permitted under both GAAP and IFRS.
Perpetual Inventory
An inventory system that updates quantities and cost of sales continuously as each sale and receipt is recorded, so stock figures are available at any moment. Physical counts still matter, but they verify the records rather than create them.
Periodic Inventory
An inventory system that establishes stock levels and cost of sales only by counting at the end of each period. Cheaper to run than a perpetual system, but shrinkage and errors stay invisible between counts.
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