Inventory Valuation for Decision Makers

Inventory valuation is one of the factors that decision makers have to consider before making any decision in their business. They can know how different inventory assumptions affect the cost of good sold and the resulting net income. Inventory valuation is value a company allocates to its inventory in storage and when it is sold. There are several methods to calculate the inventory values to know how much they cost. These methods are specific identification, cost average, first in, first out (FIFO), and last in, first out (LIFO). Each method has its own advantages and disadvantages. Some of these methods are allowed under the generally accepted accounting principles (GAAP), while others are allowed by the international financial reporting standards (IFRS). This paper is going to highlight what each method means and the positive and negative impacts of using each method. Also, this paper will touch on why different companies prefer to use different methods when valuing inventory. The LIFO liquidation problem will be mentioned to help companies to know what the consequences of using the LIFO method will be. In addition, the dollar-value LIFO method will be discussed to help companies to alleviate the LIFO liquidation problem. Throughout this paper, the model of certainty and GAAP versus IFRS perspectives about inventory will be discussed.

The first method that is used to value inventory is the specific identification method. It is an inventory valuation method that is used by companies that sell large items such as pianos and cars. Through this method, merchandising companies are able to identify which specific individual units are sold and which are still waiting in the ending inventory. In other words, companies can keep track o...

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...d average cost, specific identification, first in, first out (FIFO), and last in, first out (LIFO) methods. Each method has its own advantages and disadvantages. Companies should know the positive and the negative impacts on the inventory if they select one of the methods rather than other methods. In addition, some of the methods are allowed to use under the generally accepted accounting principles (GAAP) while others are banned under the international financial reporting standards (IFRS). Companies also should be carful when they use the LIFO method during the inflection period because it causes the LIFO liquidation problem. There is a method that called the dollar-value LIFO method which is used to alleviate the problem. Moreover, the model of certainty was discussed in this paper. In the future, I think all companies in the world will follow unified principles.