What is a common method of inventory valuation?

Inventory valuation is a critical aspect of financial accounting as it directly affects the cost of goods sold and, consequently, the net income of a business. Each of the methods mentioned—Weighted Average Cost, Last-In, First-Out (LIFO), and First-In, First-Out (FIFO)—is widely used in practice for valuing inventory and can significantly influence the financial statements.

Weighted Average Cost smooths out price fluctuations by averaging the costs of all items in inventory, which can provide a more stable expense recognition over time. This method is particularly useful in industries where inventory items are interchangeable, and individual tracking becomes cumbersome.

Last-In, First-Out (LIFO) assumes that the most recently acquired inventory items are sold first. This method can result in lower taxes during periods of inflation since it matches the higher recent costs against current revenues. However, it may also lead to obsolescence of older stock and less accurate representation of ending inventory in terms of current costs.

First-In, First-Out (FIFO) operates on the premise that the oldest inventory items are sold first. This method can reflect the current value of inventory more accurately in times of rising prices, as the remaining inventory is recorded at the most recent costs, thereby affecting both the balance sheet and profit calculation