The Valuation of Inventory

Assume you are a retailer. You bought three cases of Energy Drink from three separate sources ' one case came directly from the manufacturer at 75 cents per can. One case was an emergency fill-in that you picked up at your local warehouse store at 85 cents per can. The third case you got a great deal on from a distributor ' because the product was only weeks away from its expiration date, you only paid 60 cents per can. You opened the cases and put all 72 cans loosely on the shelf. You sold two cases worth of Energy Drink (48 cans) and have one case (24 cans) left. What is the value of your remaining inventory?

As consistent readers of this series already know by now, the answer is a very unequivocal “it depends”:

• If your accountant valued the inventory on either the First In First Out (FIFO) or Last In First Out (LIFO) method, the value of your remaining inventory would totally depend on the order in which you purchased the three cases. It could be either 75 cents per can, 85 cents per can, or 60 cents per can.
• If your accountant valued the inventory using the Average Cost method, the value of your inventory would be 73.33 cents per can, assuming you bought all three cases before you sold any cans. If you bought some, sold some, bought some more, sold some more, etc. than the average value would need to have been recalculated after every purchase transaction and would depend on both the order in which your purchases were made ,and how many sales you had between each purchase.
• If you somehow marked each can as to which purchase lot it came from and used a specific cost method to value your inventory, the value of your remaining inventory would be the specific amount that you paid for each of the remaining cans.
• Of course, if the cans remaining in your inventory are the ones with the expired dating, you have to depreciate their valuation to reflect that impairment, because whatever method you use to value your inventory it is also subject to the Lower of Cost or Market principal. If your customers don't really care how old their Energy Drink is, you may be able to keep the expired inventory at full value. On the other hand, if you are selling in a municipality with soft-drink police who will fine you $1 per can for every can past its expiration date, your inventory is worthless.

Which Valuation Method Is Better?