115 CFA
File: Financial Analysis - Reading 25 - 2. Inventory Valuation Methods

2. Inventory Valuation Methods

b. describe different inventory valuation methods (cost formulas);

c. calculate and compare cost of sales, gross profit, and ending inventory using different inventory valuation methods and using perpetual and periodic inventory systems;

d. calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods;

For what is the specific identification inventory valuation method?
The specific identification inventory valuation method is a system for tracking every single item in an inventory individually from the time it enters the inventory until the time it leaves it. This distinguishes the method from LIFO or FIFO, which groups pieces of inventory together based on when they were purchased and how much they cost. In the specific inventory method, each item is tagged with its purchase cost and any additional costs that are incurred until it is sold.

What is the weighted average cost inventory valuation method?
Using the weighted average cost method, the average cost of all units in the inventory is computed and used in recording the cost of goods sold. This is the only method in which all units are assigned the same (average) per-unit cost.

What is FIFO method of inventory valuation?
First-in, First-out. FIFO is the assumption that the first units purchased are the first units sold. Thus inventory is assumed to consist of the most recently purchased units. FIFO assigns current costs to inventory but older (and often lower) costs to the cost of goods sold.

What is LIFO method of inventory valuation?
LIFO is the assumption that the most recently acquired goods are sold first. This method matches sales revenue with relatively current costs.

Is LIFO allowed under IFRS rules? Is LIFO allows under US GAAP rules?
- LIFO is not allowed under IFRS.
- In the U.S., however, LIFO is used by approximately 36 percent of U.S. companies because of potential income tax savings.

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