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How is inventory valued? Which inventory valuation method is most popular and why? What impact on...

Question:

How is inventory valued? Which inventory valuation method is most popular and why? What impact on the financial reports can the selection of an inventory valuation method have?

Inventory:

Inventory refers to finished goods that a business holds for sale. Work in process and the raw materials that the business holds are also considered as inventories. For example, computers displayed and stored in a computer shop are inventories as they are waiting to be sold to customers. An inventory has the following characteristics:

  • Must be part of the central business for the firm.
  • The goods must be available for sale to customers.
  • The purpose of holding the good must be to sell to customers.

Answer and Explanation:

Inventory valuation is the cost associated with the items contained in a firms inventory. Inventory valuation helps a business to put monetary value for its available items. The two main methods used to value inventory are perpetual and periodic. Perpetual is the most popular method because it uses actual figures and facts thus more accurate.

The selection of the inventory valuation method has the impact of goods sold. For example, where the ending inventory records high, it leaves a few expenses to be charged to the cost of goods, thus has a significant impact on the reported profit levels.


Learn more about this topic:

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What Is Inventory? - Definition & Example

from Business 112: Operations Management

Chapter 13 / Lesson 7
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