What is the affect of valuation inventory on the P&L?
Your P&L and balance sheet are interconnected. How you value inventory determines costs of sales and therefore profit. The formula is as follows: Costs of sales = Beginning Inventory + Inventory Purchases – Ending Inventory Ending inventory depends on how you value inventory on your balance sheet. Therefore the lower the inventory, the higher costs of sales which results in lower profit. Conversely a higher inventory valuation results in lower cost of sales and higher profits.
