What methods are used for inventory valuation in financial statements?

Inventory valuation in financial statements is typically done using three methods: First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Weighted Average Cost.

The First-In, First-Out (FIFO) method assumes that the first goods purchased or produced are the first ones to be sold. This means that the cost of the oldest inventory is used to calculate the cost of goods sold, while the cost of the newest inventory is used to calculate the value of the remaining inventory. This method is most suitable when the prices of goods are rising, as it results in lower cost of goods sold and higher profits.

The Last-In, First-Out (LIFO) method, on the other hand, assumes that the most recently purchased or produced goods are the first ones to be sold. This means that the cost of the newest inventory is used to calculate the cost of goods sold, while the cost of the oldest inventory is used to calculate the value of the remaining inventory. This method is most suitable when the prices of goods are falling, as it results in higher cost of goods sold and lower profits.

The Weighted Average Cost method calculates the average cost of all the goods available for sale during the period and uses this average cost to calculate the cost of goods sold and the value of the remaining inventory. This method smooths out the price fluctuations and is most suitable when the prices of goods are relatively stable.

Each of these methods has its own advantages and disadvantages, and the choice of method can significantly impact a company's reported profits and tax liabilities. Therefore, it's important for businesses to carefully consider which method is most suitable for their specific circumstances.