Essay on Continuous Monitoring

Inventory valuation is an accounting practice used by businesses to determine the value

of unsold inventory items when generating their financial accounts. There are various inventory

valuation methods including the weighted average method and the FIFO methods. The weighted

average method uses the item's average cost over the year. The average cost per unit is computed

by dividing the total cost by the total number of units acquired over the course of a year. On the

other hand, the FIFO method assumed that the first items purchased are the first to leave the

inventory for sale.

Companies thought that FIFO is the easiest method to apply. It assumes that the flow of

costs corresponds to the flow of the goods, all because the first cost to be removed from the

inventory is the unit the company purchased first. In that way, companies cannot manipulate

sales by deciding which unit to ship. On the other hand, the weighted average method is also

used by many companies but the cost of sales in this method is higher than in the FIFO. It is not

as updated as in the FIFO but this method takes the middle-of-the-road approach (Lumen, n.d.).

Unlike in the FIFO method, companies can manipulate sales by buying or not buying goods near

the end of the year.

All inventory valuation methods involve assumptions on how cost flows into the

business. All of them are acceptable and it depends on the company which method they think fits

them the best. Having a transition from the weighted average method to the FIFO method

violated the accounting principle of consistency. However, the principle allows this given that

the company will restate all years presented in the financial statements into the new method.