The finance professionals consider Inventory Valuation as the dollar amount which is linked with all the items associated within the company’s stock. We must solely focus on the amount since it’s considered as the cost of the mentioned items.
Nevertheless, it is possible that due to some feeble situations or environmental uncertainty, the same cost drops, which affects the credibility of the dollar amount accordingly.
It depicts the total cost of the company to purchase the inventory and put them up for sale. Even though, the organization might heavily on the creation of such accounts, the cost of administration as well as selling is not included in Inventory Valuation.
Finance has given us an imperative idea that companies are abruptly selling and restocking the most demanded stock in the market with constant change in the rates. In such a scenario, Inventory Valuation helps by offering us ‘Cost Flow Assumption’ which evaluates the number of inventory items already sold or restocked as per the desired requirement on a monthly basis.
According to international accounting standards, there are three different ways to harbor inventory valuation within the company. First, it’s the cost flow assumption which solely focuses on the ‘first in and first out’ methods and secondly, the averaging strategies to acquire the cost of each unit of the stock.
Methods of Inventory Valuation:
- The Specific Identification Method
- FIFO Method
- LIFO Method.
Depending on the financial stability as well as the cash flow effects over stock valuation, the companies can use different methods to get the job done.
However, it becomes quite complex to compare one firm over another, especially, after using multiple inventory valuation methods. Such accountancy gimmicks are recommended to adjust the begin as well as the ending inventories in the companies.