Inventory Valuation

There are different methods including first-in, first-out (FIFO), last-in, first-out (LIFO) and average cost method that firms can use in order to determine the cost of inventory. All inventories in Ford Company are stated at the lower level of cost or market. Cost for a substantial portion of US inventories is determined on the basis of LIFO. For approximately 31% and 26% of inventories, were measured on the basis of LIFO in the year 2010 and 2009 respectively. As per our assignment help At the same time, remaining inventories are measured on the basis of FIFO.

Wal-Mart Company also values inventories at the lower cost or market. For substantially all of the Wal-Mart US segments’ merchandise inventories, company uses LIFO method (Annual Report, 2010). At the same time, for Sam’s Club merchandise and merchandise company’s distribution warehouses are determined on the basis of weighted-average cost using the LIFO method. On the other hand, inventories of International operations are valued on the basis of FIFO method.

Popular Inventory Valuation Method: Among different inventory valuation methods, LIFO method is most popular. Firms choose this method over others, as this method closely state the cost of goods sold at the current market cost. This method also helps companies to reduce unrealized inventory profits to a minimum. At the same time, to overcome the disadvantage of FIFO method, this method is preferred by companies. FIFO method increases the net income because inventory that might be several years old is used to value the cost of goods sold. Further, it causes to higher taxes in the company and it is the reason that most of the companies select LIFO method to value their inventory. This method is popular among firms in two cases, first, when they report financial results to shareholders and second, to file taxes. We also provide the finance and business assignment help to our clients.

Impact on Financial Reports: Selection of a particular inventory valuation method can impact on the financial report in different ways. Company’s net income statement is directly affected by selection of inventory valuation methods. Use of LIFO method results in a reduction of unrealized inventory profits thus it reduces net income. On the other hand, FIFO method results in higher net income, as, in this method, cheaper inventories are sold first by the company. In contrary to these two methods, under average cost inventory valuation method, net income varies on the basis of the number of inventory purchases during an accounting period. Inventory valuation methods also impact on the balance sheet.

Use of FIFO method increases inventory amount on the balance sheet in the period of rising prices because economic inflation enhances the prices on the most recent inventory purchases. On the other hand, LIFO method results in lower inventory amount on the balance sheet, as higher priced goods are sold first and the cheapest inventory remains in the account. In contrast, average cost method helps firms to balance these variances on the balance sheet accounts, as, in this method, inventory is valued by averaging the cost of all units. Thus, it can be stated that inventory valuation methods have an impact on financial reports.

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