When doing a valuation, the value of inventory is adjusted from book to fair market value. However, sometimes that is not sufficient to make the valuation accurately the value of the business. You may also need to adjust the income statements that are used in the valuation. Here’s why:
Inventory can be valued on the balance sheet using a variety of methods. You can, for example choose to assume that the inventory purchased most recently is sold first (FIFO First In First Out) or that the oldest inventory is sold first (LIFO), or use Average cost, or even specifically track each individual item (usually with high value items such as cars). Often, the inventory accounting method is chosen to minimize profits for tax purposes, but using profits calculated in that way may lead to an underestimate of the value of the business.
Tags: accounting methods, Inventory