Valuing inventory

In this lesson

1. 0:00 Inventory valuation in financial statements
2. 1:11 Three main inventory valuation methods
3. 2:18 How FIFO works with raw materials
4. 4:32 FIFO worked example calculation
5. 8:56 LIFO method and closing inventory
6. 12:10 AVCO weighted average cost method
7. 16:46 Comparing FIFO, LIFO, and AVCO results
8. 18:00 Impact on gross profit and financial statements

About this lesson

You'll discover why inventory valuation matters for your financial statements and cost of sales, and when each method is most appropriate in practice. The lesson walks you through each method step-by-step using a realistic worked example of raw material movements across June. With FIFO, you issue the oldest materials first, leaving newer (higher-cost) stock in closing inventory. With LIFO, you issue the newest materials, leaving older (lower-cost) stock remaining. With AVCO, you recalculate an average cost each time you receive new inventory, placing you somewhere between the two extremes. You'll see how these different approaches directly impact your closing inventory valuation and, critically, your gross profit figure. By the end, you'll understand why in a period of rising prices FIFO produces the highest closing inventory valuation and gross profit, while LIFO produces the lowest, and why AVCO sits in the middle. This knowledge is essential for both management accounting decisions and ensuring your inventory valuations align with accounting standards in your financial statements.

Duration: 19m