What does GAAP require of inventory valuation?

Under U.S. GAAP (ASC 330), inventory must be measured at cost and reported at no more than that cost, with write-downs required when market value falls below it.

For retailers, GAAP permits several cost-flow methods, including FIFO, weighted average, specific identification, and the retail inventory method (RIM). The retail inventory method is widely used by retailers managing large numbers of SKUs: ending inventory at retail is estimated by subtracting sales from goods available at retail, then converted to cost using a cost-to-retail ratio. Whichever method a business selects, ASC 330 requires consistent application from period to period. A change in method is treated as a change in accounting principle and must be justified and disclosed.

The write-down rule depends on which method you use:

• Retailers using the retail inventory method or LIFO must apply the lower of cost or market (LCM) test, where "market" means current replacement cost, capped at net realizable value and floored at NRV minus a normal profit margin.
• Retailers using FIFO, weighted average, or specific identification apply the lower of cost or net realizable value (LCNRV) test instead.

In either case, write-downs to the lower value are recognized in the current period and cannot be reversed later under U.S. GAAP.

When your inventory values need to be independently supported for financial reporting or a balance sheet audit, a professional inventory appraisal prepared in accordance with USPAP gives auditors and accountants a defensible, methodology-backed basis for the figures. You may also find it useful to understand how inventory classification approaches like the ABC method interact with your valuation and reporting obligations.