Course Outline
Join PRO

Why is the accuracy of inventory valuation so important?

Harold Averkamp, CPA, MBA

Definition of Inventory Accuracy

Inventory accuracy means the following:

  • Accurate counts of the items in inventory
  • Proper cost of each item in inventory (based on the company’s cost flow assumption)
  • Accurate tabulations
  • Proper cut-off of vendor invoices, receiving reports, etc.
  • Accounting for goods in transit, goods on consignment, etc.

The cost of each item in inventory is based on the actual costs of the items purchased or produced by the company in the current accounting period, plus the cost of the items contained in the beginning inventory.

Example of Importance of Accurate Inventory

Here is an example of why accuracy in calculating inventory is important. After accounting for the total cost of 1) the items purchased or produced in the current period, plus 2) the costs of items carried over from the previous period, must be divided up as follows:

Therefore, if too much of the total cost is assigned to the ending inventory, too little will be assigned to the cost of goods sold. And vice versa.

Further, the cost reported as inventory will affect the calculations of the company’s working capital, total assets, and stockholders’ or owner’s equity.

The amount reported as the cost of goods sold will affect the calculations of gross profit and net income.

Since the amount reported as the cost of this year’s ending inventory will carry forward to become the beginning inventory of the next year’s inventory, any error will mean the income statements of both years will report incorrect amounts for the cost of goods sold, gross profit, and net income.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews



PRO Plus

Lifetime Access (One-Time Fee)
Word Scrambles
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on

Learn More About Harold

Certificates of

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus