Inventory Valuation

There are three approaches to inventory valuation allowed by U.S. GAAP. The first one is First-in, First-out (FIFO). Under this method, the cost of inventory is based on the costs of the goods bought late in the year while the cost of sold goods is based on the cost of materials bought earliest in the period under consideration. The other approach is Last-in, First-out (LIFO). In this approach, the cost of materials bought in the end of the period is used to calculate the cost of goods sold (Needles, Powers & Crosson, 2011). However, the cost of materials bought earlier in the period is used in the calculation of inventory.  The other approach is Weighted Average. In this approach both the cost of sold goods and inventory are based on the average cost of all materials bought during the period under consideration.

Depreciation is the allocation of a tangible assets cost over its useful life. In accounting, it indicates how much of an assets value has been used up. For example a car depreciates in value with time. Amortization is the spreading of a capital expense for a tangible asset over a specific period of time.  Depletion is a periodic charge for the use of natural resources (Needles, Powers & Crosson, 2011). For example oil extraction depletes with time. All the three have the same concept in accounting since they enhance proper expense recognition.

The net book value is the price paid for a particular asset. As long as one owns the asset, this value never changes.  The fair market value is the price that the asset can attract in the market currently (Needles, Powers & Crosson, 2011). In times of liquidation, the fair market value is used since it is the price the asset will attract in the market.



Needles, B., Powers, M., & Crosson, S. (2011). Principles of accounting. Mason, Ohio: Cengage Learning.

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