Inventory Valuation Methods

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Inventory valuation is a balance sheet consideration and is distinct from the calculation of COGS, which is an income statement item. US GAAP requires that inventory valuation be carried out using the lower of cost or market. The "cost" is determined by the inventory costing method chosen, like LIFO or FIFO. If the market value of the inventory falls below that obtained under the inventory costing method, then the firm must take a charge against the current income and "write the inventory down." Under this scenario, the basic inventory equation, Ending inventory = Beginning inventory + Purchases - COGS no longer holds. If the market price rises in the subsequent period, the firm can only write-up to the original cost of the inventory under the costing method chosen. In all periods in which there is no write-up or write-down, the basic inventory equation holds true.