This document discusses inventory valuation methods. It explains that inventory includes raw materials, work in progress, and finished goods. The two main inventory valuation methods are LIFO (last in, first out) and FIFO (first in, first out). Under LIFO, the most recently produced goods are sold first, lowering costs when prices are rising. FIFO sells older goods first, which prevents expiration of inventory and decreases the impact of inflation. The document provides examples to illustrate how inventory quantities and costs are tracked under each method.

1. Fundamentals of Accounting
INVENTORY VALUATION

2. Inventory
Inventory is the one of the largest
current asset of a retail store or of a
whole business merchandise. The sale
of this inventory is the main source of
revenue.
Inventory contains materials/Products in
three forms of conditions

3. Raw Materials
The materials needed to
make anything are called
raw materials.
The initial condition of
any material is its raw
form.
Some work is needed to
make a raw material into
something useful
Consider we were making
something using steel
Steel in raw
form

4. WIP (Work in process)
The process of making raw materials into
some useful things
Steel is melted to reshape it
into something useful

5. Finished Good
The finished product formed after doing some
work on raw material.
The price of finished product is considerably high from
raw material
We can make numerous useful products
using same raw material

6. LIFO Last in First out
In LIFO the last formed products were
sold earlier then first products
Products
Sold

7. Advantages of LIFO
In times of rising
prices LIFO is
beneficial because in
LIFO the last
purchased products
(which were expensive
than older) were sold
Earlier. So the first
products will be sell at
greater profit.
Purchased
Selling Price = 100
80 80 80
Profit
2020 20
Selling Price = 150
130130
Selling Price = 200
180
70 120
To overcome it the
products last purchased
were sold with lower profit
The advantage of lower
profit is that you don’t
have to pay more income-
taxes
But in this way
income-taxes
increases
The more the
profit the more
the income-tax
has to pay
You can also sell first products at
same profit and lower price. So in
this way you can variate your price.
It also happies customers.
Sold at 110
20 20
Sold at 60

8. LIFO is also beneficial in (Non-Expiring) products.
For example
The price of Rice
increases as it gets
older
Also in Non-Muslim
countries the price of
Wine increases as it
gets older.
So if we’re using
LIFO the cost of
old rice and wine
keeps rising until
we sold them.

9. FIFO First in First out
In FIFO the first formed products were
sold earlier than last formed products
Products
Sold

10. Advantages of FIFO
The main advantage of FIFO is that the products were
less likely to expire. Because in FIFO the oldest product is
sold earlier
When you’re using FIFO your
inventory is showing latest prices
of the products because the old
products were already sold.

11. If Inflation (Increase in market prices) occurs. FIFO
decreases the impact of inflation on the company
Purchased
200030005000
Market Price = 2000Market Price = 3000Market Price = 5000
Profit
3000
Market Price = 6000
6000
30001000
Instead of
Market Price = 7000

12. Inventory
Valuation
is
recorded
in balance
sheet

13. Purchased Sold Balance
Date Units Unit Cost
Total
Cost Units UnitsUnit Cost Unit Cost Total Cost
Total
Cost
5 Feb 2 1000 2000 2 1000 2000
7 Feb 7 1200 8400
2
7
1000
1200 10400
10 Feb
1 1000
1000
1
7
1000
1200
9400
12 Feb
1 1000
1000 0
7
1000
1200
8400
FIFO

14. Purchased Sold Balance
Date Units Unit Cost
Total
Cost Units UnitsUnit Cost Unit Cost Total Cost
Total
Cost
5 Feb 2 1000 2000 2 1000 2000
7 Feb 7 1200 8400
2
7
1000
1200 10400
10 Feb
1 1200
1200
2
6
1000
1200
9200
12 Feb
2 1200
2400
2
4
1000
1200
6800
LIFO

15. Purchased Sold Balance
Date Units Unit Cost
Total
Cost Units UnitsUnit Cost Unit Cost Total Cost
Total
Cost
5 Feb 2 1000 2000 2 1000 2000
7 Feb 3 1200 3600 5 1120 5600
10 Feb 1 1120 1120 4 1120 4480
Average
2000+3600=5600
2+3=5
5600/5=1120

16. The End