A Study on Inventory Valuation Methods and Their Effect on Profitability and Financial Health

A. Amala

Research Scholar, Department of Management, Shri JJT University, Jhunjhunu, Rajasthan, India
Dr. Saurabh Kumar Singh

Research Guide, Department of Management, Shri JJT University, Jhunjhunu, Rajasthan, India

Abstract :This study examines the impact of various inventory valuation methods on a company’s profitability and overall financial health. Inventory valuation is a critical aspect of financial reporting, influencing key metrics such as gross profit, net income, and liquidity ratios. The research focuses on three primary methods: First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Weighted Average Cost (WAC), analyzing their effects under different market conditions and cost fluctuations. Using quantitative analysis of financial statements from multiple firms across industries, the study identifies how each method affects profitability, tax obligations, and financial stability. The findings reveal that FIFO generally increases reported profits during inflationary periods, while LIFO may reduce taxable income, and WAC provides a balanced approach. The study underscores the strategic importance of selecting an appropriate inventory valuation method in alignment with financial and operational objectives.

Keywords: Inventory valuation, FIFO, LIFO, Weighted Average Cost, profitability, financial health, financial reporting, cost of goods sold, liquidity, tax planning