What your stock is worth on paper
Stock value affects profit, tax and borrowing, and the method used is frequently whatever the software defaulted to.
Stock is an asset and its value flows into the accounts, the tax position and any lending secured against it. The number depends on the valuation method, and small businesses often do not know which one they are using.
Annual labour cost depends on converting working time into a yearly total. For a reference calculation, see this explanation.
None of what follows is accounting or tax advice; the rules differ by jurisdiction and warrant a conversation with your accountant.
The common methods
First in, first out assumes the oldest stock is sold first, so the remaining stock is valued at the most recent prices. In a period of rising costs this produces a higher stock value and a higher reported profit.
Weighted average smooths purchase prices across all units held. Simpler to operate and less sensitive to the order of purchases.
Last in, first out — where it is permitted at all, which varies considerably by country — has the opposite effect to the first method.
For U.S. accounting context, IRS Publication 538 explains accounting methods and includes guidance relevant to inventories.
Changing method changes the reported profit without anything real changing. Most accounting frameworks require a consistent approach and a disclosed change.
Cost is not just the purchase price
The cost of an item usually includes what it took to get it into a sellable state: freight in, import duty, and sometimes handling.
Excluding these understates stock value and overstates cost of sales in the period. Including them requires the receiving process to capture the associated charges, which is another reason those figures belong on the receiving record.
Write down what will not sell for cost
Most accounting frameworks require stock to be carried at the lower of cost and what it will actually realise. Obsolete and damaged stock carried at full cost overstates the assets.
This is the accounting reason for the dead stock review, alongside the operational one, and it is why the review needs to happen before the year end rather than after it.
The count is the evidence
Whatever the method, the valuation rests on a physical count. Auditors and lenders will ask how the quantity was established and when.
A documented cycle counting programme with recorded accuracy is generally a stronger answer than one annual count, and businesses are frequently surprised that it is accepted as such.
Know what it means for tax
Stock value affects taxable profit in most systems, which means write-off timing has a tax effect and the evidence requirements matter.
This is the single strongest practical reason to record write-offs contemporaneously with reason codes rather than adjusting quietly.