INVENTORY VALUATION

As inventory is usually purchased at different rates (or manufactured at

different costs) over an accounting period, there is a need to determine
what cost needs to be assigned to inventory. For instance, if a company
purchased inventory three times in a year at $50, $60 and $70, what
cost must be attributed to inventory at the year end? Inventory cost at
the end of an accounting period may be determined in the following
ways:

First In First Out (FIFO)

Last In First Out (LIFO)
Average Cost Method (AVCO)

 First In First Out (FIFO)

"FIFO" stands forfirst-in, first-out,

This method assumes that inventory purchased first is sold first.

Therefore, inventory cost under FIFO method will be the cost of latest
purchases.

 Last In First Out (LIFO)

This method assumes that inventory purchased last is sold first.

Therefore, inventory cost under LIFO method will be the cost of earliest
purchases.

Since the 1970s, some U.S. companies shifted towards the use of LIFO,
which reduces their income taxes in times ofinflation, but since IFRS
banned LIFO, more companies returned to FIFO.

LIFO is used only in theUnited States, which is governed by the

generally accepted accounting principles(GAAP).

 Average Cost Method (AVCO)

This method values inventory at the weighted average cost of all

purchases.

Average cost is calculated each time inventory is issued.

 Example

 FIFO

As can be seen from above, the inventory cost under FIFO method relates to
the cost of the latest purchases.

 LIFO

Therefore value of inventory using LIFO will be based on outdated prices.

 AVCO

AVCO method allocates cost on the average cost of purchases during the
period. Average cost of inventory changes every time a purchase is made at a
different price.

 WEIGHTED AVERAGE METHOD