How is inventory valued?

[ratiman]

This is a dumb question but I couldn't find the answer. When a company lists inventory at $10mm, is that the cost of the inventory or the retail price? I would assume it's the cost but if so, many of the companies I follow don't turn over the inventory more than once a year. I know there are some accounting experts on here who might help with this basic question.

[Dinar]

Lower of cost or market.  Now there are different inventory costing methods - FIFO, LIFO, average costs, and some companies capitalize expenses such as overhead into inventories.

Edited January 17, 2023 by Dinar

[ratiman]

Thanks. I thought that was the answer but I've run into some companies with such slow turns that I thought it might be that the company was valuing inventory at retail price. Another quick question: if a company ships off the inventory to a retailer, does the inventory shift to the retailer or is it still considered in inventory until the retailer pays?

[Dinar]

1 minute ago, ratiman said:

Thanks. I thought that was the answer but I've run into some companies with such slow turns that I thought it might be that the company was valuing inventory at retail price. Another quick question: if a company ships off the inventory to a retailer, does the inventory shift to the retailer or is it still considered in inventory until the retailer pays?

If I remember correctly, once you ship the inventory, you take it off your books and put accounts receivable on.   There may be nuances, you may need to put allowance for bad debt expense.   You do not wait until you get the cash.  The exception would be retail trade - I walk into a super market, buy an apple, cash changes hands and inventory falls.  If the company has slow turns, you need to compare it with others in the industry (and its own history) to make sure that there is no fraud (inventory on the books that does not exist in reality.)

[ratiman]

Thanks, that is helpful.