Inventory Valuation Methods: A Comparative Analysis of Approaches

This assignment delves into the critical area of inventory valuation methods, essential for accurate financial reporting. It explores four primary methods: Last-In, First-Out (LIFO), First-In, First-Out (FIFO), the Specific Identification method, and the Weighted Average method. The assignment explains how each method impacts the valuation of inventory and the cost of goods sold (COGS). It highlights the implications of each method, including how LIFO might understate inventory values during inflation, while FIFO aligns with the natural flow of inventory. The assignment also discusses the practical application of each method, including scenarios where the specific identification method is most suitable, and where the weighted average method is most appropriate. References from accountingtools.com and thebalancesmb.com are also provided for additional reading and understanding.

INVENTORY METHODS

METHODS OF INVENTORY VALUATION
Inventory is one of the major item of financial statement and it is necessary
that inventory should be recorded at correct value.
The method of inventory valuation which are used primarily are as below:
 Last in first out (LIFO)
 Specific Identification method
 First in first out (FIFO)
 Weighted average method
The inventory includes mainly finished goods, raw material and WIP. (Bragg S
2019)

LIFO METHOD (LAST IN FIRST OUT)
Under this method the items which has been purchased first will remain in
stock. The item which has been purchased in last will be charged to COGS.
The major drawback of the method is that inventory value will be
understated because it generally happens that old inventory items
purchase are cheaper than new one because of inflation.
 LIFO and FIFO methods both are beneficial and provide best results when
the data is maintained in computer system. (Rosemary Peavler 2018).

SPECIFIC IDENTIFICATION METHOD
Under this method each item is separately recorded and cost of good sold
is recorded separately when that individual item is sold related to which
COGS has been assigned.
This approach is very lengthy and cumbersome because the lot of data
tracking is required.
This method is used when the inventory items are of high value in nature
and generally used in automobile industry. This method is not used and
viable in most of the cases.

FIRST IN FIRST OUT METHOD (FIFO)
 Under this method the items which bought in last will remain in stock and
bought first will be charged to cost of goods sold first.
 This method is very useful and it match closely the actual movement of
the inventory.
 This method is widely preferred in the situation of inflation as the earliest
bought units are sold first and it is assumed that the units which are
subjected to least expensive are charged to the COGS first (Bragg S 2019)
 The classical example of FIFO method is fruits and vegetables, and fresh
dairy products.

WEIGHTED AVERAGE
METHOD
 Under this method, the cost of all item purchased during the year are
clubbed together and average rate is calculated and according cost of
inventory is determined.
This method is generally used where the items are of similar nature. The
example of weighted average method is similar kind of electrical tools.

REFERENCES
Bragg S March 2019. Accounting Inventory methods. Retrieved from
https://www.accountingtools.com/articles/2017/5/13/accounting-inventor
y-methods
Rosemary Peavler October 2018. Basics of LIFO and FIFO Inventory
Accounting Method. Retrieved from
https://www.thebalancesmb.com/basics-of-lifo-and-fifo-inventory-account
ing-methods-393396

Thanks