Inventory glossary

What is Inventory valuation?

Inventory valuation is the method used to assign a dollar value to the stock a store currently holds.

Inventory valuation matters because it directly changes your reported profit and the value of your business on paper. If you value stock incorrectly, your cost of goods sold is wrong, which means your gross margin and taxes are wrong too. For a small Shopify store, this becomes important at tax time and when you want to know your real profit per product line.

Most small stores pick either FIFO or weighted average cost and stick with it, since switching methods makes it hard to compare performance across periods. Check with your accountant on which method suits your business and tax situation, then apply it consistently as you buy and sell stock.

Formula

Weighted average cost = total cost of inventory / total units FIFO cost of goods sold = cost of oldest units sold first

Example

A candle store buys 100 candles at $4 each, then later buys 100 more at $5 each. Using FIFO, if they sell 120 candles, the cost of goods sold is 100 x $4 plus 20 x $5, which is $500. Using weighted average, the cost per unit is (100 x $4 + 100 x $5) / 200 = $4.50, so cost of goods sold for 120 units is $540.

Common mistakes

  • Switching valuation methods between periods, which makes profit comparisons meaningless.
  • Forgetting to include shipping or handling costs that should be part of unit cost.
  • Using sale price instead of cost price when valuing stock on hand.

Inventory valuation and SteadyShelf

SteadyShelf does not handle inventory valuation or accounting, it focuses on forecasting demand and generating purchase orders so you reorder the right quantities on time.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Cost of goods sold · FIFO · LIFO · Weighted average cost · Gross margin

Full inventory glossary

FAQ

Does FIFO and weighted average give the same inventory value?

No. Both value the same stock, but FIFO assumes you sell oldest units first and weighted average blends all costs together. On rising costs, FIFO usually shows higher inventory value and weighted average smooths it out. Pick one method and use it consistently.

Does inventory valuation affect how much stock I should reorder?

No. Inventory valuation tells you what your stock is worth on paper. Reorder decisions depend on how fast items sell and supplier lead times, not on their dollar value.

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