Inventory Valuation Methods

When assigning costs to inventory, one should adopt and consistently use a cost-flow assumption regarding how inventory flows through the entity. Examples of cost-flow are:

The specific identification method, where you track the specific cost of individual items of inventory

The first in, first out method, where you assume that the first items to enter the inventory are the first ones to be used

The last in, first out method, where you assume that the last items to enter the inventory are the first ones to be used

The weighted average method, where an average of the costs in the inventory is used in the cost of goods sold

Whichever method you choose will affect the inventory valuation recorded at the end of the reporting period.