What are the valuation methods used in inventory management?

There are three methods with the help of which company can evaluate its inventory and the methods are:
·         FIFO method
·         LIFO method
·         Weighted average method

These methods are divided into two parts that is:
·         Periodic method: In this method the inventory is updated regular interval of time.
·         Perpetual method: In this method the inventory is updated continuously. Under this method two       journal entries were formed when sales made:

• Accounts Receivable a/c Dr.

                          Sales a/c

•   Inventory a/c Dr.

                    Cost of goods sold a/c

•  FIFO (First In First Out) method: In this method the stock which comes first into warehouse is sold first. The value shown in trading and profit and loss a/c as a cost of goods sold is the value of older stock or the stock which comes first in warehouse. The value of newer stock is mention in balance sheet under the current assets. In inflation the FIFO shows lower amount of cost of goods sold and greater net income and vice versa.
• LIFO (Last In First Out) method: In this method the last stock (newer stock) which comes into warehouse is sold first. The value shown in trading & profit and loss a/c as cost of goods sold is the value of newer stock. The value of older stock shown in balance sheet at the end of the year. In inflation the LIFO shows higher amount of cost of goods sold and lower net income and vice versa.

• Weighted Average method: In this method the total cost of sales unit is divided by number of units available for sale. It includes all stock available for sale. 

Example: From the given information find out the cost of goods sold and ending inventory      with the help of FIFO, LIFO and Weighted Average method under periodic method:

Date	Particulars	Units	Cost per unit	Total Cost
1st April	Beginning inventory	200	15	3, 000
6 April	Purchase	350	18	6, 300
8 April	Purchase	600	22	13, 200
	Total	1, 150		22, 500
15 April	Sales	620	25	13, 000
	Total	620		13, 000

  Solution:

Date	Particulars	Units	Cost per unit	Total Cost
1st April	Beginning inventory	200	15	3, 000
6 April	Purchase	350	18	6, 300
8 April	Purchase	600	22	13, 200
Total		1, 150		22, 500
15 April	Sales	620	25	15, 500
15 April	FIFO: Cost of goods sold	200*15 = 3,000 350*18 = 6, 300 70*22 = 1, 540		10, 840
	Ending Inventory	530*22 = 11, 660		11, 660
	LIFO: Cost of goods sold	600*22 = 13, 200 20*18 = 360		13, 560
	Ending Inventory	330*18 = 5, 940 200*15 = 3, 000		8, 940
	Weighted Average: Cost of goods sold	22, 500/1, 150 = 19.56 620*19.5652 = 12, 130.424		12, 130.424
	Ending Inventory	530*19.5652 = 10, 369.565		10, 369.565

 Example: From the given information find out the cost of goods sold and ending inventory      with the help of FIFO, LIFO and Weighted Average method under perpetual method:

Date	Particulars	Units	Cost per unit	Total Cost/ Revenue
4 April	Purchase	350	24	8, 400
19 April	Purchases	920	35	32, 200
	Total	1, 270		40, 600
8 April	Sales	280	32	8, 960
22 April	Sales	420	38	15, 960
29 April	Sales	310	42	13, 020
	Total	1, 010		37, 940

  Solution:

Date	Particulars	Units	Cost per unit	Total Cost/ Revenue
4 April	Purchase	350	24	8, 400
8 April	Sales	280	32	8, 960
	FIFO: Cost of goods sold (COGS)	280 * 24 = 6, 720		6, 720
	LIFO: COGS	280 * 24 = 6, 720		6, 720
	Weighted Average :  COGS	280 * 24 = 6, 720		6, 720
19 April	Purchases	920	35	32, 200
22 April	Sales	420	38	15, 960
	FIFO:  COGS	70*24 = 1, 680 350*35 = 12, 250		13, 930
	LIFO:  COGS	420*35 = 14, 700		14, 700
	Weighted Average:  COGS	420*34.221 = 14, 372.4		14, 372.4
29 April	Sales	310	42	13, 020
	FIFO:  COGS	310*35 = 10, 850		10, 850
	Total Cost of goods sold			31, 500
	Total ending Inventory	260*35 = 9, 100		9, 100
	LIFO:  COGS	310*35 = 10, 850		10, 850
	Total Cost of goods sold			32, 270
	Total ending inventory	70*24 = 1, 680 190*35 = 6, 650		8, 330
	Weighted Average: COGS	310*34.22 = 10, 608.2		10, 608.2
	Total cost of goods sold			31, 700.6
	Ending inventory	260*34.22 = 8, 899.4		8, 899.4 2

Working notes:

Calculations	Units	Cost per unit	Amount
	70	24	1, 680
Add:	920	35	32, 200
	990	34.22 1	33, 880
Less	420		14, 372.4
	570		19,507.6
Less:	310		10, 608.2
	260		8, 899.4 2