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In accounting, any way to estimate and report how much a company's inventory is worth. There are two primary ways to calculate inventory valuation. The first in, first out technique treats inventory acquired first as if it were sold first. That is, the sale of inventory is recorded against the purchase price of the oldest inventory, even if the physical goods are not the same. The last in, first out technique does the opposite: it records sales against the purchase price of the most recently acquired inventory. Both of these techniques are designed to estimate the value of inventory in a way that will decrease the company's tax liability while not reducing the book value of its assets.
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The cost assigned to inventory for the purpose of establishing its current value. Inventory valuation is determined according to the basis by which a firm assumes inventory units are sold. If the first units acquired are assumed to be the first units sold (first-in, first-out), costs of the last units purchased are used for valuing inventory remaining in stock. Conversely, if the last units acquired are assumed to be the first units sold (last-in, first-out), the costs of the first units purchased are used for valuing the inventory remaining in stock.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.