Inventory valuation
Inventory valuation, in accounting, refers to a methodology whereby inventory on hand is valued after a portion of it is sold or is otherwise removed.
There are four methods which are commonly used to value inventory: specific identification, FIFO (First In, First Out), LIFO (Last In, First Out), and average costing (which may be simple or weighted).
Specific Identification
Under this method, each inventory item is given a specific identification number, and when that item is sold it is removed from inventory.
This method is used only on large-ticket items which can be separately identified, such as houses and cars.
Example
The developer of Eagles Landing, a subdivision, has completed three houses but has not yet sold them:
| Address | Cost |
|---|---|
| 101 Bald Eagle Boulevard | $150,000 |
| 102 Golden Eagle Way | $155,000 |
| 103 Spotted Eagle Street | $159,000 |
The developer's inventory would show $464,000 in housing inventory.
Then, the developer sells the house at 103 Spotted Eagle Street. The inventory would be reduced by $159,000 (the cost to build that house) for remaining inventory of $305,000. If the developer then completes a house at 104 Bald Eagle Boulevard for $150,000, the inventory is increased to $455,000.
