Valuation of Inventories:

Classification of Inventory:

Inventories are assets items for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. The investment in inventories is frequently the largest current asset of merchandising and manufacturing businesses. Therefore description and measurement of inventory require careful attention. Click here to read more.
Difference between Perpetual and Periodic Inventory System:

Under a perpetual inventory system, a continuous record of changes in inventory is maintained in the inventory accounting. That is, all purchases and sales (issues) of goods are recorded directly in the inventory account as they occur. Click here to read more.
Basic Issues in Inventory Valuation:

Goods sold or used during an accounting period seldom correspond exactly to the goods bought or produced during that period, the physical inventory either increases or decreases. The cost of all the goods available for sale or use should be allocated between the goods that were sold or used and those that are still on hand. Click here to read more.
Average Cost Method:

As the name implies, the average cost method prices items in the inventory on the basis of the average cost of all similar goods available during the period. Click here to read more.
First In First Out (FIFO) Method:

The first in first out (FIFO) method assumes that goods are used in the order in which they are purchased. In other words, it assumes that the first goods purchased are the first used (in manufacturing concerns) or the first goods sold (in the merchandising concerns). Click here to read more.
Last In First Out (LIFO) Method:

The last in first out (LIFO) method first matches against revenue the cost of the last goods purchased. It a periodic inventory system is used, then it would be assumed that the cost of the total quantity sold or issued during the month have come from the most recent purchases. Click here to read More
LIFO Reserve:

The difference between the inventory method used for internal reporting purposes and LIFO is called "LIFO reserve" or "allowance to reduce inventory to LIFO". Click here to read more.
LIFO Liquidation:

The erosion of the LIFO inventory is referred to as LIFO liquidation. Erosion means the unavailability or shortage of raw materials or other inputs that enforces companies to use its existing assets. Click here to read more.
Basis for Selection of Inventory Method:

How does one chose among the various inventory methods( Average, LIFO, FIFO). Although no absolute rules can be stated, preferability for LIFO can ordinarily be established. Click here to read more.