2 Inventory valuation methods for your business + WACC

2 Inventory valuation methods for your business + WACC

This will help your business manage your assets more effectively.

Here's a breakdown ⤵

📦 LIFO (Last-In, First-Out)

Understand LIFO

→ Costs of recent purchases are assumed to be sold first.

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↳ Use LIFO in industries where costs rise over time.

↳ Employ it to reduce tax liabilities during inflationary periods.

Benefits of LIFO

→ Matches current costs with revenues.

→ Reduces tax liabilities in rising cost environments.

Drawbacks of LIFO

→ May not reflect actual goods flow.

→ Can decrease reported profits during inflation.

→ Requires complex inventory tracking.

📦 FIFO (First-In, First-Out)

Understand FIFO

→ Assumes the oldest inventory items are sold first.

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↳ Ideal for perishable goods industries.

↳ Use to mirror the actual flow of goods.

Benefits of FIFO

→ Accurately matches the flow of goods.

→ Easier inventory tracking and accounting.

Drawbacks of FIFO

→ Increased tax liability in inflation.

→ May not fit all industry scenarios.

📦 WAC (Weighted Average Cost)

Understand WAC

→ Averages cost of inventory items, irrespective of purchase date.

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↳ Suitable for fluctuating inventory costs.

↳ Averages costs for simplified valuation.

Benefits of WAC

→ Balances valuation and reduces impact of cost fluctuations.

Drawbacks of WAC

→ Might not reflect current market values.

→ Not tied to specific sales or purchase events.

Understanding these methods can significantly impact your financial strategy.

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