Inventory Value Study Sheet
Posted by Professor Cram in Inventory
Business Math Terms
- Cost of Goods Sold is a measure of the direct cost involved in acquiring or producing goods that are, in turn, sold. The methods of measuring cost of goods sold are explained below, but a company's chosen method must be consistent with their method of measuring inventory value.
- Inventory represents finished and unfinished goods which have not yet been sold by a company.
- Inventory Valuation is a measure of the value of a comapny's unsold inventory. The methods of measuring inventory value are explained below, but a company's chosen method must be consistent with their method of measuring cost of goods sold.
Inventory Valuation
Average Cost Method
- Assumes an inventory of non-unique goods (that is, every one is similar to every other one)
- Not generally recommended where prices are volatile
- Tends to even out price fluctuations over time
- Uses the average unit cost to calculate the value of current inventory:
Average Unit Cost = (Total Unit Cost)/(Total Quantity of Units)
Inventory Value = (Average Unit Cost) x (Units of Current Inventory)
FIFO (First In, First Out) Method
- Assumes an inventory of non-unique goods (that is, every one is similar to every other one)
- Generally preferred inventory valuation method
- Assumes inventory is sold in the order that it is stocked, with the oldest goods sold first and the newest goods sold last
- Uses the unit cost per batch of acquired/produced goods, and counts the inventory backwards from the newest batch:
Unit Cost per batch = (Cost/Quantity) for each batch
Inventory Value = (Unit Cost x Quantity) for each batch
LIFO (Last In, First Out) Method
- Assumes an inventory of non-unique goods (that is, every one is similar to every other one)
- Is highly regulated (or, in some cases, illegal) as a method for measuring inventory value
- Assumes newest inventory is sold first, with the oldest goods sold last
- Uses the unit cost per batch of acquired/produced goods, and counts the inventory forwards from the oldest batch:
Unit Cost per batch = (Cost/Quantity) for each batch
Inventory Value = (Unit Cost x Quantity) for each batch
Inventory Rates and Ratios
Inventory Turnover Rate At Cost
- Measures inventory turnover over a period of time, as defined by the starting and ending dates
- Given the cost of goods sold, starting inventory value at cost, and the ending inventory value at cost (all from the balance sheet):
Average Inventory Value at Cost = (Starting Inventory + Ending Inventory)/2
Rate = (Cost of Goods Sold)/(Average Inventory Value at Cost)
Inventory Turnover Rate At Retail
- Measures inventory turnover over a period of time, as defined by the starting and ending dates
- Given the cost of goods sold, starting inventory value at cost, and the ending inventory value at cost:
Average Inventory Value at Retail = (Starting Inventory + Ending Inventory)/2
Rate = (Net Sales)/(Average Inventory Value at Retail)
Inventory Turnover Ratio
- Demonstrates the company's ability to convert inventory into cash, and is one predictor of a company's liquidity
- Generally a higher ratio is better, but values should be compared with industry averages for the best interpretation
- Given a company's sales (from the income statement) and inventory value (from the balance sheet):
Inventory Turnover Ratio = (Sales)/(Inventory Value)
Get More Help!
Click one of these links to get more help from another Cramlet in this same chapter:
- Inventory Value Study Sheet
- Inventory Turnover Rate at Retail
- Inventory Turnover Rate at Cost
- Inventory Value: LIFO
- Inventory Value: Average Cost Method
- Inventory Value: FIFO
- Cost of Goods Sold Overview: Study Sheet
- Cost of Goods Sold: LIFO
- Cost of Goods Sold: FIFO
- Cost of Goods Sold: Average Cost Method
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