It is the process of assigning value to a company’s inventory. Inventory typically represents a large portion of the assets of any company that sells physical items, so it’s important to measure its value in a consistent manner. A clear understanding of inventory valuation can help maximize profitability. It also ensures the company can accurately represent the value of inventory on its financial statements. There are several methods for calculating inventory value. The costing method is defined in the product category. There are three options available. Standard Price, Average Price, FIFO.
The way a company values its inventory directly affects its cost of goods sold (COGS) , gross income and the monetary value of inventory remaining at the end of each period. Therefore, inventory valuation affects the profitability of a company and its potential value, as presented in its financial statements.