Question

Valuation Methods:

Gross Profit Method

Retail Inventory Method

Which methods can be used to record a loss of inventory valuation?

Know what can be included in machinery/inventory valuation – Insurance, costs to transport,

installation, set up, taxes, etc

Answer 1

1) VALUATION METHODS:

The various valuation methods for inventory valuation:

1. Perpetual method of inventory valuation: As per this system there is the practice of recording the sales revenue as and when each sales happens at the time of the occurrence of the sales and for facilitating this system the inventory valuation methods used are as follows:

1. First-in First-out
2. Last-in Last-out
3. Highest-in , First-out
4. Average cost or the weighted average cost method

2. Periodic method of inventory valuation: In this system the changes and updates are accounted for on a periodic basis.
3. Non cost methods of inventory valuation : These methods are used when the valuation of inventory based on cost is not practicable. The various inventory valuation methods used are as follows:

1. Lower of cost or market value
2. Net Realisable Value

4. When it is not possible to take a physical inventory:In these situations the various inventory valuation methods used are as follows:

1. Retail inventory method
2. Gross Profit method

2) GROSS PROFIT METHOD:

The gross profit method is a technique used to estimate the amount of closing inventory. The method of inventory valuation could be used for the purpose of the   financial statements prepared on a monthly basis especially in situations when a physical inventory is not possible for various reasons. This method is also ideal when it is required to calculate the amount of missing inventory arising out of theft, fire or any other disaster.

3) RETAIL INVENTORY METHOD

The retail inventory method is is based on the understanding the connection and relationship between the cost of merchandise and its retail price. This method of inventory valuation is at times made use of by retailers that resell their merchandise in order to calculate an estimate of their closing inventory balances. This method needs to be complimented by a physical inventory counting as this method is not completely accurate.

4 ) In case of loss of inventory valuation the ideal method would be the lower of cost or market method of valuation as this method of inventory valuation offsets the decrease or the loss in the inventory valuation against the income of the relevant period. In situations when the decrease in inventory value is due to the fact that the inventory is damaged or has become obsolete leading to a situation in which the goods can be sold only at a value that is lower than the purchase price of that inventory then the method of inventory valuation to be followed is the net realizable value method.