Inventory valuation

Inventory Valuation

Meaning and Importance

Inventory valuation is the process of assigning a monetary value to unsold stock at the end of an accounting period. It directly affects the Cost of Goods Sold (COGS) and the reported profits.

Need for Inventory Valuation

• To calculate true profit or loss
• To determine accurate COGS
• For proper balance sheet representation
• For tax assessment
• To identify wastage or loss

Methods of Inventory Valuation

1. FIFO (First-In, First-Out)

Assumes oldest inventory is sold first. Closing stock reflects recent costs.

Example:

If 150 units sold: 100×₹10 + 50×₹12 = ₹1600 COGS

2. LIFO (Last-In, First-Out)

Assumes latest inventory is sold first. Closing stock reflects older costs.

Example: 100×₹12 + 50×₹10 = ₹1700 COGS

3. Weighted Average Cost (WAC)

Uses average cost of units for COGS.

Average Cost = (100×10 + 100×12) / 200 = ₹11

COGS for 150 units = 150 × ₹11 = ₹1650

4. Specific Identification

Used for unique/high-value items. Each unit is tracked with its actual cost.

Summary Table

Conclusion

Each method of inventory valuation affects profit, taxes, and balance sheet differently. The choice of method depends on the nature of the business and compliance requirements.