Inventory Valuation Methods
In case the company has a number of inventory items acquired during a particular period and having different prices, certain valuation methods has to be applied to calculate Cost of Goods Sold and value of the inventory remaining on hand. These methods are:
FIFO (Fist-in-First-out)
Applying FIFO inventory valuation method for accounting purposes it is assumed inventory is sold in the order it is received from the supplier, i.e. the earliest acquired inventory items are being sold first. The name of the method means that item which was included in inventory first os sold first. The picture below demonstrates this principle.
We have 4 items acquired during June. One item is sold. Applying FIFO inventory valuation method, it is assumed that earliest inventory item is sold. Therefore Cost of Goods Sold will amount to $125 - cots of the inventory item acquired on June 5.
LIFO (Last-in-First-out)
Applying LIFO inventory valuation method for accounting purposes it is assumed inventory is sold starting from recently acquired items, i.e. the latest acquired inventory items are being sold first. The name of the method means that item which included in inventory last is sold first. The picture below demonstrates this principle.
We have 4 items acquired during June. One item is sold. Applying LIFO inventory valuation method, it is assumed that latest acquired inventory item is sold. Therefore Cost of Goods Sold will amount to $100 - cots of the inventory item acquired on June 20.
Average Price
Applying Average price inventory valuation method average cost price of all items is calculated and is applied to estimate Cost of Goods Sold. The picture below demonstrates this principle.
We have 4 items acquired during June. One item is sold. Applying Average price inventory valuation method average cots price of all items is calculated, i.e. we add up all the prices and divide by number of items. Therefore Cost of Goods Sold will amount to $143.75 - average cost of one item.
Exact Price
Applying Exact price inventory valuation method it is know exactly which item was sold and what was the cost of that item. This method applies when inventory items are unique in nature and it is easy to identify which particular item was sold. The picture below demonstrates this principle.
We have 4 different items acquired during June. One item is sold. Applying Exact price inventory valuation method it is known which item was sold. Therefore Cost of Goods Sold will amount to $150 - precise price of the item sold.
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