Inventory valuation methods: GAAP

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1. Are there any other inventory valuation methods acceptable under GAAP besides LIFO, FIFO, average cost and specific identification? If so, when is it appropriate to use the other method(s)? (Provide the Codification reference for your answer)

Yes, the retail method is acceptable (FASB, 330-10-30-13). You can use it when you do not have exact counts (so you are plugging inventory based on achieving a particular expected mark-up).

References
FASB (2013). Codification accessed 10-25 from https://asc.fasb.org/print&rendercmd=section&trid=2127012&nav_type=section_rollover_page_functions&addTOC=1

> Determination of Inventory Costs
330-10-30-9 Cost for inventory purposes may be determined under any one of several assumptions as to the flow of cost factors, such as first-in first-out (FIFO), average, and last-in first-out (LIFO). The major objective in selecting a method should be to choose the one which, under the circumstances, most clearly reflects periodic income.
330-10-30-10 The cost to be matched against revenue from a sale may not be the identified cost of the specific item which is sold, especially in cases in which similar goods are purchased at different times and at different prices. While in some lines of business specific lots are clearly identified from the time of purchase through the time of sale and are costed on this basis, ordinarily the identity of goods is lost between the time of acquisition and the time of sale.
330-10-30-11 Accordingly, if the materials purchased in various lots are identical and interchangeable, the use of identified cost of the various lots may not produce the most useful financial statements. This fact has resulted in the general acceptance of several assumptions with respect to the flow of cost factors such as FIFO, average, and LIFO to provide practical bases for the measurement of periodic income.
330-10-30-12 Standard costs are acceptable if adjusted at reasonable intervals to reflect current conditions so that at the balance-sheet date standard costs reasonably approximate costs computed under one of the recognized bases. In such cases descriptive language shall be used which will express this relationship, as, for instance, "approximate costs determined on the first-in first-out basis," or, if it is desired to mention standard costs, "at standard costs, approximating average costs.
330-10-30-13 In some situations a reversed mark-up procedure of inventory pricing, such as the retail inventory method, may be both practical and appropriate. The business operations in some cases may be such as to make it desirable to apply one of the acceptable methods of determining cost to one portion of the inventory or components thereof and another of the acceptable methods to other portions of the inventory.
330-10-30-14 Although selection of the method should be made on the basis of the individual circumstances, financial statements will be more useful if uniform methods of inventory pricing are adopted by all entities within a given industry."

2. What does the Codification say about consistency regarding the application of the chosen inventory valuation method? (Provide the Codification reference for your answer)

It indicates that consistency is required and whatever method is chosen must be consistently applied.

"330-10-30-15 While the basis of stating inventories does not affect the overall gain or loss on the ultimate disposition of inventory items, any inconsistency in the selection or employment of a basis may improperly affect the periodic amounts of income or loss. Because of the common use and importance of periodic statements, a procedure adopted for the treatment of inventory items shall be consistently applied in order that the results reported may be fairly allocated between years."

3. If the company were to choose one inventory valuation method in the current year, and then decide in the following year to change inventory valuation methods to a method that better approximates the company's actual costs: (Provide the Codification references for your answers)

A change in method is a change in accounting principle and can be justified based on an improvement in financial reporting (FASB 330-10-35-20). The change must be disclosed and justified and all prior periods reported must be restated to use the new method "retrospectively" (FASB, 250-10-55-1).

> Accounting Changes
330-10-35-19 Paragraph 250-10-55-1 explains that a change in composition of the elements of cost included in inventory is an accounting change and provides related guidance.
330-10-35-20 The definition of direct effects of a change in accounting principle includes a change in inventory valuation methods as an accounting change.
> Implementation Guidance
> > Change in the Composition of Inventory Costs
250-10-55-1 A change in composition of the elements of cost included in inventory is an accounting change. An entity that makes such a change for financial reporting shall conform to the requirements of this Subtopic, including justifying the change on the basis of preferability as specified by paragraphs 250-10-45-11 ...