Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion INVENTORY ASSESSMENT Inventory valuation is an important aspect of financial accounting, because inventory is a significant asset for many companies. Inventory valuation is carried out to determine the value of inventory to be recorded in the financial statements and also to determine the cost of goods sold in the income statement. In this material, we will explain some of the inventory valuation methods that are commonly used and how the use of each method can affect a company's financial statements. 1. Average Cost Method (Average Cost Method) This method calculates the value of inventory by allocating the cost of inventory available during a certain period, such as a month or year, to the entire amount of inventory available for that period. Then, the inventory value is calculated by dividing the total cost allocated by the amount of inventory available. This method is easy to use and provides a stable and consistent inventory value. However, this method does not accommodate price fluctuations and does not take into account the shelf life of the inventory. 2. FIFO Cost Method (First-In, First-Out Method) This method calculates the inventory value based on the price of the goods that first enter the inventory. Thus, the cost of goods sold is calculated based on the price of the goods that were first entered. This method takes price fluctuations into account and provides a more realistic cost of goods sold. However, this method is not suitable for companies that have inventory with a long shelf life or when inventory prices fluctuate greatly. 3. LIFO Cost Method (Last-In, First-Out Method) This method calculates the inventory value based on the price of the last item entered into inventory. Thus, the cost of goods sold is calculated based on the price of the last goods entered. This method is suitable for companies experiencing inflation, because the price of newer goods will be higher than the price of older goods. However, this method is not suitable for companies that have inventory with a long shelf life or when inventory prices fluctuate greatly. 4. Market Price Method This method calculates the value of inventory based on current market prices. If the market price is higher than the acquisition price, the inventory value will be increased to the market price. If the market price is lower than the acquisition price, the inventory value will be reduced to the market price. This method is suitable for companies that sell goods at prices that follow market fluctuations. However, this method is not suitable for companies that sell goods at fixed prices or companies that have inventory with a long shelf life. 5. Specific Acquisition Price Method (Specific Identification Method) This method calculates the value of inventory based on specific inventory prices, such as serial numbers or batch numbers. This method is suitable for companies that have inventory with unique characteristics, such as antiques or items that have special specifications. However, this method is difficult to implement because it requires detailed records and requires close monitoring of inventory. The choice of inventory valuation method must be chosen based on the needs of the company and the characteristics of the inventory it has. Each method has advantages and disadvantages, so companies must consider these factors before choosing the right method. In addition, companies must also pay attention to applicable accounting standards and follow the rules issued by regulatory authorities and related regulators. In examining the financial statements, the auditor will evaluate whether the valuation of the company's inventory has been carried out correctly and in accordance with the applicable accounting standards. Accurate and consistent inventory valuation is very important for the company because it can affect the company's financial statements and financial performance. An undervaluation can result in higher profits and lower taxes, while an overvaluation can result in lower profits and higher taxes. Therefore, companies must pay close attention to inventory valuation and make necessary adjustments if there is a change in the price or shelf life of the inventory. In addition, companies must also pay attention to appropriate inventory management policies to avoid losses due to unsold or damaged inventory. This policy is included in the company's risk management and operations management. In practice, companies usually carry out an inventory valuation at the end of the financial reporting period. Proper and consistent inventory valuation can help companies make better decisions and ensure company compliance with applicable accounting standards. In the end, inventory valuation is an important part of financial accounting that must be done correctly and accurately. In selecting the appropriate inventory valuation method, a company must pay attention to the characteristics of its inventory and comply with applicable accounting standards. In addition, proper inventory management is also needed to avoid losses due to unsold or damaged inventory.