Inventory appraisal provides information on the value of goods held in inventory, which can make up a substantial portion of a company’s equity. There are different ways to perform inventory valuation and record inventory movement, such as perpetual and periodic methods, and different methods for inventory valuation, such as first in, last out, last in, first out, and averaging. The choice of method affects the valuation of inventory, which is important because prices change over time.
An inventory appraisal is a statement that provides information about the value of goods held in inventory. Inventory commodities can make up a substantial portion of a company’s equity and therefore there is great interest in the total value of a company’s stock. This information is reported in financial statements that can be used internally and externally for a variety of activities related to accounting, broader evaluation and business decision-making.
There are several ways to perform an inventory valuation and several approaches to maintaining inventory-related records. One method is to record sales and inventory movement as they occur. For example, when a book sells a copy of a dictionary, it would record the fact that the inventory was short of a dictionary, while still noting the amount of the sale. This is called perpetual registration, because the inventory numbers are constantly updated. One benefit of this system is that it provides real-time data that can be reviewed at any time and used for everything from evaluating inventory to ordering new products to replacing things that are out of stock.
Another method is periodic. In this case, the sales are recorded as they occur, but the inventory change is not. At the end of a certain period, the inventory is manually counted and posted. For example, in an ice cream shop, people don’t log each scoop as it leaves the inventory. Instead, they notice how many tubs of ice cream the store has at the end of the day.
In addition to having different ways to track inventory, there are also different methods that can be used for inventory valuation, based on how people record the value of items in their inventory. One is the first in, last out method, which assumes that when an item is sold, it was the oldest of that item in inventory. For example, if a store receives shipments of shampoo on Mondays and Wednesdays and sells four bottles of shampoo on Friday, those units are treated as coming from Monday’s shipment for accounting purposes. Last in, first out is another method that can be used for inventory valuation; in the shampoo example, the four units sold on Friday would be treated as coming from Wednesday’s shipment. Averaging is also possible.
One of the reasons it’s important to know which inventory valuation method is being used is because prices change over time. To borrow the shampoo example, the store could have gotten Wednesday’s bottles at a better price from the distributor than Monday’s. The difference in accounting methods can change the valuation of the inventory; if the store has 22 bottles in stock, the inventory valuation will vary depending on the method used.
Protect your devices with Threat Protection by NordVPN
