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What are inventory valuation methods?

Inventory valuation is the total value of a company's current, unsold inventory. There are various ways you can value your inventory; two of the most popular are FIFO (First In, First Out) and LIFO (Last In, First Out). Your chosen method is usually based on tax requirements, inventory flow, record structure, or national laws and regulations.

FIFO is by far the most common practice inventory valuation method. It's advantageous for most companies to sell their oldest stock first, particularly if items are perishable or seasonal. Let's say you have 100 units of a hat that costs $5. You need to replenish your stock, but now the hat costs $5.50. Because you have more of the $5 hats, the value of your inventory will be closer to $5. But as you sell the old $5 hats, the value of your merchandise will begin to increase towards $5.50.

Live inventory valuation data is vital to understanding your business needs and profitability. Inventory accounts for a large portion of business assets. Accountants need to know these numbers to report profitability and file taxes properly. Real-time inventory valuation helps paint a picture of your business and gives you the insights needed to improve profitability.


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