What methods are used for valuing inventory?

The appropriate methods for valuing inventory primarily involve assessing the cost of the inventory and its net realizable value. The cost method takes into account all expenses incurred in bringing the inventory to its current condition and location, which includes purchase price, shipping fees, and any additional costs up to the point of sale.

On the other hand, net realizable value is crucial in determining the value of inventory for financial reporting. This method estimates the amount for which the inventory can be sold, minus any costs that will be incurred to make the sale—such as selling expenses and any expected losses from obsolescence. This approach ensures that the inventory is not overstated on the balance sheet, aligning the valuation with the expected economic benefits.

Together, these methods help present a more accurate financial position of a business by ensuring that inventory is valued at its lower-of-cost-or-net-realizable-value, complying with the accounting principle of prudence. Other mentioned methods, such as market value and replacement value, may be used in certain contexts but do not align as precisely with standard inventory valuation accounting practices under generally accepted accounting principles.