Browse Accounting Lessons Here Accounting Terms & Definitions Accounting for Merchandising Activities Debits and Credits (Double Entry Accounting) Business Valuation Formulas Time Value of Money & Present/Future Values Complex Debt & Equity Instruments Common Stock & Shareholder's Equity Accounting & Finance Ratios Valuing Common Stock Corporate Income Taxes Lower of Cost or Market (LCM) & Inventory Valuation Chart of Accounts & Bookkeeping Bonds Payable & Long Term Liabilities Capital Assets GAAP, Accrual & Cash Accounting, Information Commodity, Internal Controls & Materiality What category of browser are you on this website? Accounting student (homework help) Finance professor (university research) Accounting manager (at work) Other Explore Careers in Accounting and Finance Visit our section on Careers in Accounting & Finance to explore vast opportunities in this industry.

Chapter 3.8® - Glossary of Important Inventory Valuation Terms

Cost of Inventory - Cost refers to the acquisition price of inventory calculated using one of the historical cost principle methods such as specific identification, LIFO/FIFO or Average cost.

Direct Inventory Costing Method - Direct method involves simply recording the ending inventory at the market figure at year-end if lower than cost. Then, the market value number is substituted for cost when valuing the inventory. As a result of this, no loss is reported separately on the income statement because the loss is hidden in cost of goods sold.

Gross Profit Method - It is most often used when an interim financial report needs to be prepared and on hand inventory number is to be derived. Other cases when it is used include when inventory is destroyed by fire or some natural disaster, and the amount of inventory destroyed in the catastrophe is to be estimated for insurance purposes.

The gross profit method of estimating inventory is based on three assumptions:

i) The beginning inventory + purchases = the cost of goods available for sale that must be accounted for:

ii) Goods not sold must be on hand in ending inventory (logically)

iii) When net sales (reduced to cost) are deducted from cost of goods available for sale, the result is net ending inventory.

Net realizable value (NRV) - NRV is the inventory’s estimated selling price in the ordinary operations of the business minus reasonable predictable costs to complete and dispose of the item.