Inventory Valuation
Inventory valuation is the dollar value of your unsold stock, carried as an asset on the balance sheet at cost, not at what you'll sell it for. The method you choose, FIFO or weighted average cost for most sellers, decides how costs flow into COGS as units sell. Get the valuation wrong and both your profit and your taxes are wrong, in whichever direction the error runs.
Valuation errors are silent because inventory sits in places you don't see: FBA warehouses, a 3PL, a container on the water. Say a seller thinks they hold $220,000 of stock but actually holds $180,000 after shrinkage, unrecorded disposals and lost units. Assets are overstated by $40,000, and so is profit, since missing inventory eventually has to flow through COGS. That surprise tends to surface at the worst moments: a lender's field exam or a buyer's diligence.
How is inventory valued?
At cost, using one consistent method. Cost means full landed cost: what you paid the supplier plus freight, duty and prep to get the unit sellable. The method decides which cost attaches to which unit when you've bought the same SKU at different prices. Four choices exist.
FIFO assumes the oldest units sell first. LIFO assumes the newest do, and is rare in ecommerce. Weighted average blends every purchase into one running cost. Specific identification tracks each serialized unit, which suits refurbished electronics and not much else.
One formula ties it together: beginning inventory plus purchases minus COGS equals ending inventory. Any two of those numbers fix the third, so a wrong ending inventory value flows straight into a wrong COGS and a wrong profit.
When inventory is worth less than it cost
Cost is the ceiling, not the floor. If stock can no longer sell for what you paid (a model was discontinued, a season passed, Amazon flooded the category), accounting rules require a write-down to net realizable value. That's the expected selling price minus the cost to sell it. A pallet of phone cases that cost $4 each and now clear at $2.50 after fees gets carried at $2.50. The $1.50 difference hits the P&L now, not when the cases finally sell. Sellers hate booking that loss. Lenders and buyers hate finding it later more.
Inventory values on the tax return
The IRS generally requires inventory accounting for businesses that sell goods. One exception: businesses under roughly $30 million in average gross receipts can treat inventory as non-incidental materials and supplies and follow their book method. Most ecommerce sellers qualify, which is how some cash-basis sellers get away with expensing purchases. Getting away with it on the return and understanding your business are different things. The accrual valuation is still what tells you whether you made money.
Keeping the number honest
The discipline is periodic reconciliation of book inventory to physical and platform counts, valued at true landed cost. For multi-location operations we tie FBA, 3PL and warehouse counts monthly. It's part of monthly bookkeeping, and for larger operations running NetSuite, the valuation lives directly in the ERP.
Common questions
How often should inventory be valued? Monthly, as part of the close, using platform and warehouse counts. A full physical count at least once a year, with cycle counts on fast movers in between.
Do I include inventory in transit? Yes, once title passes to you, which under FOB shipping terms is when it leaves the supplier's dock. A container on the water is your asset and your risk.
What about inventory at FBA? Still yours, at cost, until it sells. Amazon's Inventory Ledger is the count source, and the gap between it and your books is where shrinkage and unclaimed reimbursements hide.
Where this shows up in our work
This isn’t textbook material for us; it’s the day-to-day of keeping seller books right. See how we handle it in practice:
Monthly Ecommerce Bookkeeping →