how inventory accounting works
gaap requires inventory to be properly accounted for according to a very particular set of standards to limit the potential of overstating profit by understating inventory value profit is revenue minus costs revenue is generated by selling inventory if the inventory value or cost is understated then the profit associated with the sale of the inventory may be overstated that can potentially inflate the company s valuation the other item the gaap rules guard against is the potential for a company to overstate its value by overstating the value of inventory since inventory is an asset it affects the overall value of the company a company which is manufacturing or selling an outdated item might see a decrease in the value of its inventory unless this is accurately captured in the company financials the value of the company s assets and thus the company itself might be inflated advantages of inventory accountingthe main advantage of inventory accounting is to have an accurate representation of the company s financial health however there are some additional advantages to keeping track of the value of items through their respective production stages namely inventory accounting allows businesses to assess where they may be able to increase profit margins on a product at a particular place in that product s cycle this can be seen most prominently in products that require exceptional time or expense in secondary stages of production items such as pharmaceuticals machinery and technology are three products that require large amounts of expense after their initial designing by evaluating the value of the product at a certain stage such as clinical trials or transportation of the product a company can adjust the variables at that stage to keep the product value the same while increasing their profit margins by decreasing expenses 