Inventory Valuation Methods for a Dynamics GP Dummy

During the sales process I try to avoid questions regarding inventory valuation and to be honest I do this because I do not understand the differences and what impact the valuation options have on the financials. I am not an accountant nor do I try to be, however I should really have a better understanding of inventory valuation methods after years of selling to manufacturing and distribution companies. Of course, I do not implement the solutions; our consultants do all the planning and inventory costing recommendations with the business CFO. I have decided it is high time to understand this critical area of business.

There are lots of good articles and websites on this subject matter and I have learned that the way you value your inventory can have a huge effect on your financials. After researching this topic, I have also learned that I am probably not qualified to write an intelligent article on inventory valuation. Therefore, I am going to list some resources for you and me to reference.

Probably the easiest for me to understand came from my Bing search term Inventory Valuation Method Under GAAP. Inventory Valuation Methods paper by Dr. M.D. Chase of Long Beach State University.

Another good resource is the AccountingCoach website. There is a good explanation of Inventory and Cost of Goods Sold and a whole lot more if you are interested.

I have also attached a white paper How to determine, maintain, and report accurate costing in inventory for review. This was written in 2007 for Dynamics GP 9 and 10, however it is still valid for GP 2010. One item that has been updated in the document is the historical inventory trial balance report. The paper states that this is coming in new release and it is now available in GP 10 service pack to and of course in GP 2010.

Dynamics GP uses the following valuation methods:

Valuation Method	Description within Dynamics GP
FIFO perpetual	Items purchased first are considered sold first (First In, First Out). Detailed information about the cost of all items is maintained, and the inventory is valued at its actual cost. The current cost for items is the cost of the item the first time it was received.
LIFO perpetual	Items purchased last are considered sold first (Last In, First Out). Detailed information about the cost of all items is maintained, and the inventory is valued at its actual cost. The current cost for items is the cost of the item the last time it was received.
Moving average perpetual	The cost of items with the same item number is totaled and an average cost is assigned to the items. The average cost of an item is revalued throughout the period as you enter increase transactions for items. The average cost also is used as the current cost. The formula is:(Current units x current moving average cost) + (New units x purchase price) / (Current units + new units)
FIFO periodic	Items purchased first are considered sold first (First In, First Out), and are valued at their standard cost. To update the standard cost, you can use the Inventory Year-End Closing window. At the end of the year, the standard cost can be adjusted to the current cost.
LIFO periodic	Items purchased last are considered sold first (Last In, First Out), and are valued at their standard cost. To update the standard cost, you can use the Inventory Year-End Closing window. At the end of the year, the fixed cost can be adjusted to the current cost, or the cost of the item the last time it was received.

As stated previously, I am not an expert however there is a plethora of information on inventory valuation and best practices for Dynamics GP on the Internet. I do think that I have learned enough to know that I will continue to defer to one of our consultants on this matter during the sales process!

If you care to comment on the information above or have any questions please feel free to contact me at 817-640-0016 x 109 or by emailing me at [email protected]

Custom Information Services (CIS) is a Dynamics GP reseller in North Texas.