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INVENTORY VALUATION METHODS

The valuation methods or inventory valuation methods are techniques used in order to
select and apply a specific basis for valuing inventories in monetary terms. The inventory
valuation is a vital process when acquisition unit prices have been different.

There are 3 methods for valuing inventories, which are:
FIFO
Commonly known as FIFO (First In, First Out), this method of inventory valuation is based
on the logical interpretation of the movement of the units in the inventory system,
therefore the cost of recent purchases is the cost of inventories, in the same order they
entered the store.
FIFO part the first units of products that were purchased were the first sold. In an
inflationary economy, this means that the cost of goods or products sold is determined
based on older prices and consequently profits will be contributed artificially higher,
although unsold inventories are recorded in the balance, to the nearest or current.

The advantage of applying this technique is that inventories are valued with the most
recent costs, because the oldest costs are those that shape to suit the first cost of sales or
production (cost of outputs). The main disadvantage of using this technique is that
production costs and low sales that typically shows logically increases profits, thereby
generating more tax.

LIFO
The LIFO method is the inverse of the FIFO method because it, unlike the former, part of
the assumption that the last units in input are sold first, and consequently, the cost of
sales will be recorded by more cost prices high, thus decreasing the utility and tax payable,
but undervaluing the dollar amount of inventories valued appears that the older prices.
Commonly known as LIFO (Last In, First Out), this valuation method is based on the latest
articles that became part of the inventory, are the first to be sold, of course depending on
the unit cost, ie the flow physical is irrelevant, what's important here is that the unit cost
of the latest entries is that applicable for early departures.
The advantage of applying this technique is that the inventory be valued with the oldest
cost which incurs a cost less than your average inventory value, which is very useful in
times of inflation when the costs are constantly increasing.



Weighted Average Method
The average cost represents the arithmetic mean or average obtained by dividing the
aggregate amount of the purchase of goods, the number of items purchased.
For the average cost inventory value of the goods including the number of units is divided,
yielding an average unit cost to be used for valuing inventories so as to value the cost of
sale.
The cost of sales at the unit price of the stock has two modes of calculation is valued;
weighted average cost and average moving cost.
It is based on the assumption that both the cost of sales as the final inventories should be
valued at an average cost

When the permanent inventory system used two situations may arise that would yield
different results for the final inventory valuation and determination of cost of sales. In the
first, if only costs are recorded at the end of the period (month, quarter, semester or
year), at that time one cost averages. With inflation adjustments, the procedure is the
same only taking into account the cumulative adjustments made to the initial inventory
and purchases

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