Chapter 8
Inventory Valuation
231
7
The value of ending inventory is 55 pens at the average unit cost of approximately $13.38.Total
value of inventory is $735.95.
The Effect of Different Valuation Methods
As the previous example with Cool Ink Company demonstrates, different ending inventory figures
are produced using different valuation methods. The chart in Figure 8.5 summarizes these
differences for the Cool Ink example.
Specific
Identification
FIFO
Weighted-
Average Cost
Inventory Available for Sale
(beginning inventory + purchases)
$1,580
$1,580
$1,580
Ending Inventory
790
810
735.95
Value of COGS
790
770
844.05
______________
FIGURE 8.5
The above example illustrates an important point.
In cases where the unit cost of inventory increases
over a period of time, the FIFO method results
in the highest value of ending inventory and the
lowest value of COGS. This also results in the
highest profit for the period. Similarly, in cases
where the unit cost of inventory decreases over a
period of time, the FIFO method results in the
lowest value of ending inventory and the highest
value of COGS. Therefore, two identical companies using different inventory valuation methods
will show different financial results.
Determining the Actual Quantity of Inventory
Goods are moved in and out of inventory all the time, which is why recording the amount and
quantities bought and sold is so important. This is done when the goods enter the premises at
purchase and when they leave the premises at sale. The reliability of the information recorded at
these points must be assured.
For example, the items must be counted when they are received, and these amounts should be
compared to the amounts listed on the original purchase order. Any discrepancies must be noted
and followed up. Once the inventory count is complete, the company’s records should be updated
immediately.
Before goods can leave the premises, a release order, such as a packing slip, must be written up and
authorized. Just as goods coming in have to be recorded, goods moving out must also be recorded.
The shipper should note which goods are leaving and forward the documents to the accounting
department to ensure the information is entered into the system.
Accounting software will usually allow you to
select which inventory method you wish to
use. In addition to using specific identification,
FIFO or weighted average, software may also
allow for the last-in, first-out (LIFO) valuation
method. This method is not allowed under
ASPE or IFRS, but is allowed in the United
States.
