Inventory Valuation

Effectively measuring and managing inventory is essential in keeping a companies financial statements up to date; inventories are a part of the Balance sheet and are represented as short term assets Inventory can be defined as assets that are held for the purpose of sale or inventory can refer to assets that are being converted to a form which can be sold or even assets that assist in the production of goods which will be sold.

 Inventory Calculation :
Inventory : Beginning Inventory + New inventory Purchased (minus) Cost of Inventory sold

Types of Inventory
Raw materials: The purchased items or extracted materials that are transformed into components or products.

Work-in-process (WIP): Any item that is in some stage of completion in the manufacturing process. Finished goods: Completed products that will be delivered to customers.

 INVENTORY VALUATION Inventory valuation and management is a very important part of managing the Current assets account on the balance sheet. If this aspect is not done properly, the ramifications are far reaching; total assets and shareholders equity will be affected on the balance sheet while net income will be affected on the Income statement . In order to properly manage and match up revenues derived from the cost of inventory, companies use the following inventory valuation methodologies; First-In First-Out (FIFO), Last-In First-Out (LIFO), Average Cost, and Specific Identification

 First in first out : ( FIFO) FIFO matches up sales with inventories in a sequential manner by matching the revenues from the first sale with the costs associated with the first product that was made. Last-in First-Out (LIFO) LIFO takes the opposite approach to FIFO; it matches in the reverse order. The first sale is matched against the last product produced and therefore, the last good sold will be matched up with the first good produced. Basically, LIFO is assuming that a company sells off its last product produced, first.

 Average Cost
The average cost method of inventory management is pretty straight forward. This method values inventory costs as the average unit cost between the assets in the beginning inventory and the newly acquired assets. There is no inventory matching required

Specific Identification Specific identification is more manually intensive method of managing inventory. Companies will literally identify each item in inventory and record the capital gain(loss) when that specific item is sold. Each item will remain in the inventory until it is sold.