Having an accurate valuation of inventory is important because the reported amount of inventory will affect 1) the cost of goods sold, gross profit, and net income on the income statement, and 2) the amount of current assets, working capital, total assets, and stockholders' or owner's equity reported on the balance sheet. In fact, an incorrect inventory valuation will cause two income statements to be incorrect. The reason is the ending inventory of one accounting period will automatically become the beginning inventory in the subsequent accounting period.

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