Inventory or stock is the good or material that a business holds for the ultimate goals to have a purpose of resale. In other words, inventory is a complete list of items such as property, goods in stock or the contents of a building.
Inventory is a current asset to the company’s balance sheet. More important, it is a major part of your ongoing business operations. The primary function of inventory is to balance demand and supply, bring efficiency and establishing a safety stock. This is the reason why companies have greater oversight over their stock.
There are four methods for inventory valuation.
First in first out (FIFO)
Last in first out (LIFO)
Highest in first out (HIFO)
Average cost or weighted average cost.
These methods produce different results. The FIFO method bases its cash flow on the chronological order purchases are made, while the LIFO method bases its cash flow on reverse chronological order. The HIFO method bases its cash flow on purchases with the highest value and the average cost or weighted average cost method produces a cash flow based on weighted average of goods.
Now, the question arises that which is the best inventory costing method.
It is difficult to choose FIFO as a best method or LIFO. If your business deals with supermarkets, auto dealers, auto parts, construction, wine or beer shop, furniture stores then LIFO is the best way to value your current assets.
On the other hand, if you have a small business or you deal with perishable products like fruits, vegetables, bread and goods for export then FIFO is the best way to value your current assets. Bank and railway sector also use FIFO method.