Inventory Valuation Questions

Seems like this'll be an interesting topic; bookmarking for later viewing.

Meanwhile, guess I'll add for now...

@dalzell99  While I'm sure one of the others will be along with a more in-depth explanation later, and while there are a number of different ways that inventory can be calculated, the actions of your supplier(s) after the fact will not have an impact on your inventory valuation in and of themselves.

After all, what if you never buy from them after the first transaction? Accountants would be going crazy (well, crazier) if they had to constantly monitor the business practices of everybody their respective business has ever done business with when calculating inventory values.

This is what confuses me. As you can see in question 3, the current price does matter as the value of the oranges from the first purchase has changed from $50 to $100. So the act of purchasing more oranges then somehow makes the first 5 oranges double in value.

@dalzell99  "A week later, I see that the price has doubled to $20 each so I update the purchase price of both. I then decide to buy 10 more of each."

Well, if you update the historical price in QB, it will naturally update the value of the inventory to match. It's simply multiplying the purchase price by the number of inventory items; A x B = C will change if you increase A.

"I now have $250 worth of apples and $300 worth of oranges according to Quickbooks."

Going out on a limb here, but I would assume that you have two Inventory items for Apples and one Inventory item for Oranges, or two 5 X $10 and 10 X $20 items for Apples and one 15 X $20 item for Oranges. That would math out to the $250.00 and $300.00 valuation for Apples and Oranges, respectively.

@Rainflurry  Going on past topics, I feel like you might enjoy answering this one. I know the basic theory of Inventory, but none of my clients actually use it, so I doubt I'd be the best teacher here.

I'll explain some information regarding the value of purchased inventory in QuickBooks Online (QBO), Dalzell99. 

QBO uses the First In, First Out (FIFO) concept to track inventory. This considers the first units purchased to be the first units sold. 

The value of the inventory you hold is based on its historical purchase cost and not the current purchase price. In your first scenario, if you buy 5 items at 10$ each, it totals to 50$. 

If the supplier increases the purchase price to $20 for future purchases, it won't affect the value of the items you already have in inventory. The current value of the 5 items you have would still be $50 ($10 per item).

Accounting for inventory can depend on the inventory valuation method your business uses, and QuickBooks uses FIFO. Thus, the value of your existing inventory remains at the historical purchase price until you buy more at the new price, at which point the valuation method would affect the overall inventory value.
 

When you purchase additional inventory (10 items at 20$), the total value of your inventory needs to be recalculated based on the inventory valuation method you're using. 
 

Under FIFO, the oldest inventory items are sold first.
 

• Initial 5 items at $10 each = $50
• An additional 10 items at $20 each = $200

The inventory value is: (5 items * $10) + (10 items * $20) = $50 + $200 = $250

Moreover, understanding the discrepancy in inventory value for apples and oranges can be explained through the principles of inventory valuation and how you are inputting data into QuickBooks.

For a comprehensive explanation, check out these articles: 

• Set up and track your inventory in QuickBooks Online.
• What is FIFO, and how is it used for inventory cost accounting?

You may also read about common QuickBooks inventory accounting mistakes and find ways to avoid them.

Need help setting up and managing inventory? Partner with our QuickBooks Live Expert Assisted team for tailored advice. They offer personalized support, including help with setup, bookkeeping, transaction organization, and financial management.

The Community team is always available if you have more questions or concerns regarding your inventory management in QuickBooks. Please leave a reply below and we'll gladly assist. 

"Going out on a limb here, but I would assume that you have two Inventory items for Apples and one Inventory item for Oranges, or two 5 X $10 and 10 X $20 items for Apples and one 15 X $20 item for Oranges. That would math out to the $250.00 and $300.00 valuation for Apples and Oranges, respectively."

I have 2 products. The current quantity on both is 15. The only difference is when I created the Apples I had already purchased 5 so it had an initial quantity of 5 whereas the initial quantity of Oranges was 0. The amount of money I spent on both is $250 yet their current values are different.

@dalzell99 

"I have 2 products. The current quantity on both is 15. The only difference is when I created the Apples I had already purchased 5 so it had an initial quantity of 5 whereas the initial quantity of Oranges was 0."

When you set up the Apple's inventory product, how did you add the initial quantity and value of the 5 apples?  If you entered a cost, QB will calculate the starting value of those 5 apples as 5 x the cost entered.  If you didn't add the cost on the product's setup screen, QB will assume the starting value of those 5 apples was $0.       

"The amount of money I spent on both is $250 yet their current values are different."

Does the $250 include the initial 5 apples you had in inventory or did you spend $250 on 10 apples ($25/ea.)?  QB is calculating the current inventory value for the apples based on the quantity X cost entered for the initial 5 apples plus 10 x cost of the subsequent 10 apples purchased.         

@Rainflurry  
"When you set up the Apple's inventory product, how did you add the initial quantity and value of the 5 apples?  If you entered a cost, QB will calculate the starting value of those 5 apples as 5 x the cost entered.  If you didn't add the cost on the product's setup screen, QB will assume the starting value of those 5 apples was $0."

The apples were created with the initial quantity of 5 and purchase price of $10. I then clicked edit, changed the purchase price to $20 and saved. I then clicked edit again, clicked Quantity to go to the inventory adjustment screen and set the new quantity to 15. The only difference with the oranges is that I create it with quantity of 0 and purchase price of $10 and saved. Then edited the quantity to 5. Then edited price to $20. Then edited quantity to 15.

"Does the $250 include the initial 5 apples you had in inventory or did you spend $250 on 10 apples ($25/ea.)?  QB is calculating the current inventory value for the apples based on the quantity X cost entered for the initial 5 apples plus 10 x cost of the subsequent 10 apples purchased."

The $250 does include the initial 5. There were 2 purchases of apples and oranges, both were 5 x $10 then 10 x $20. Nothing was sold.

Given that everyone I have asked says nothing wrong, I'll just leave it and move on

@dalzell99 

"The $250 does include the initial 5. There were 2 purchases of apples and oranges, both were 5 x $10 then 10 x $20. Nothing was sold."

If you want to see how QB is calculating the inventory value for each, go to Reports > Standard Reports > Inventory Valuation Detail.  Select "All Dates" for the report period.  Look under apples and oranges.  It will display exactly what transactions were created to calculate the current value for each.