Convert Inventory Valuation Methods

Inventory Valuation is one of the most important metrics of success for your business. If you have been tracking Inventory via FIFO and want to switch to Average Cost, or vice versa, there are several aspects of LOU that will be impacted by that change.

 

Check out Average Cost vs FIFO for information on the differences in these Inventory Valuation Methods.

IMPORTANT! This process is for companies that are already live on LOU with one Inventory Valuation Method looking to convert to a different method. You should not switch back and forth between Inventory Valuation Tracking methods. Once you choose, it’s best to stick with it. Consult your Accountant for guidance. Companies currently onboarding in LOU should determine which Inventory Valuation Method they want to use and toggle the correct choice during Inventory setup.

WAIT! We recommend working with your accountant to schedule this change for a time that makes sense for bookkeeping. For example, you may want to make this change on the last day of your fiscal year, or at month end, so that you are not impacting the GL and reporting in the middle of a cycle.

 

Go to Setup / Accounting / Inventory Valuation Method

 

Prepare to Change Inventory Valuation Methods

There are a few things you should do before changing your Inventory Valuation Method.

  1. Consult with your Accountant/CPA: Before making the switch, make sure you consult with your accounting professional to make sure the change is compliant with IRS guidelines and requirements.
    1. Your accounting professional may prefer an Inventory Valuation Method for reporting and tax purposes.
  2. Physical Count: Perform a Physical Count to make sure your Inventory is correct.
    1. This process will help identify Negative Quantities that must be corrected before you can change Inventory Valuation Methods.
    2. This process will also ensure you begin tracking Inventory by the new Valuation Method with accurate Inventory counts.
  3. Negative Quantities: Make sure all negative quantities are corrected. LOU will not allow the Inventory Valuation Method to be changed until all negative quantities are appropriately resolved.
    1. Purchase Inventory to back fill quantities.
    2. Perform a Stock Transfer, if company quantities allow.
    3. Perform a Stock Adjustment if appropriate.
  4. Reports: Once the Inventory is correct, run your reports before continuing.
    1. IMPORTANT! Make sure to run all reports related to SKU Cost that are important to your business prior to changing the Inventory Valuation Method so that you can have accurate reports for the current, active Inventory Valuation Method. Reports run after changing methods will reflect the new Inventory Valuation Method and may impact your ability to accurately report your valuation prior to the change.
    2. General Ledger: Changing methods will not impact transactions already posted to the GL. After the change, you will still be able to see postings to accounts such as COGS reflected appropriately as they were at the time of posting. Any transactions posted after the change will be posted according to the current, active Inventory Valuation Method.
    3. Month or Year End: Make sure you run all your Month or Year End reports because some reports will change because of changing the Inventory Valuation Method. If you are changing methods at the end of the Month or Year, you should make sure all reports for that Month/Year have been run so they are accurate.
      1. LOU Accounting (AR/AP): Month End and Year End
      2. AR Accounting only (LOU Accounting not enabled): Month End and Year End
    4. Inventory Valuation: No matter when you are changing Inventory Valuation Methods, you should run an Inventory Valuation report prior to changing the method so that you can have a final accurate reporting of valuation under the current method for your records.
      1. This will also help you understand reporting under the new method by comparing changes to the Inventory Valuation report after the method has been changed.

 

 

Choose Inventory Valuation Method

When you click open next to Inventory Valuation Method, a pop-up will open, giving you two toggles to choose from.

The Inventory Valuation Method currently active in LOU will be toggled on and the other will be off. The warning text lets you know a few things that will happen while the switch is being performed. Here are some things you should know:

  1. Changing methods will significantly impact your company’s accounting process because your Valuation will be tracked and recorded differently.
    1. This will impact the way COGS posted and the way reports involving SKU Cost are calculated.
    2. This will not change previous GL postings, but will impact GL postings, particularly COGS, going forward.
    3. Reports run for dates prior to the change will run according to the current, active Inventory Valuation Method.
  2. While LOU is making the change, all transactions will be paused.
    1. You will not be able to Invoice Orders, perform Stock Adjustments or Transfers, post Payments, complete Sales Transactions on LOU Retail POS, Receive Inventory, create Purchase Orders, perform a Physical Count, or run reports containing SKU Cost information.
  3. When you begin the conversion, all LOU users for your company will be logged out and you will be unable to access LOU until the conversion is complete.
    1. Admins will receive an email upon completion.

IMPORTANT! This process will be scheduled to run late at night to mitigate the inconvenience of the down system time.

 

Once LOU has completed the conversion, all admins in your company will receive an email.

 

 

Inventory Valuation Tile

Prior to July 29, 2025, the SKU Profile had a tile called FIFO Log under the Stock Adjustments and Transfers section. This tile is now called the Inventory Valuation Log and will be where you access the FIFO Log when using FIFO to track inventory and the Average Cost Log when using Average Cost to track inventory.

 

 

Inventory Valuation Log as FIFO

This tile contains all the information regarding the FIFO postings for transactions for the SKU. More information on the FIFO Log information can be found here.

This screen is the FIFO Transactions page, showing you both the Input transactions (receiving or adjusting in Inventory), and Output transactions (selling or adjusting out Inventory). The upper right quickly shows you Total Cost and Quantity On Hand.

As you review this list of transactions, you can see each Cost at which the item was added/Received into your Inventory. You can drill down on Purchase Receipts for additional information. Likewise, you can see the dates each item was sold – and drill down on those transactions as well.

 

 

Inventory Valuation Log as Average Cost

This tile contains all the information regarding Average Cost postings for transactions for a SKU.

 

This is the Average Cost Log. Each line item reflects an Input Transaction. In this case, the Serialized SKU was received in single quantities each time. Notice the Cost. This is the same SKU shown in the FIFO Log above, but the 4 individual Costs reflected on the FIFO Log have been averaged and that average displays for each quantity. In the upper right corner, the Total Cost and Quantity On Hand are the same. You can use the Actions link on each line item to open the transactions and review information on the Purchase Receipt.

IMPORTANT! When you convert Inventory Valuation Methods, the Post Dates on the Average Cost Log will reflect the day the conversion took place and not the original FIFO Log Post Date which corresponds to when the Inventory initially came into your Inventory. You can click through to the Purchase Receipt to see the original transaction date.

 

 

Inventory Valuation Report Differences

The active Inventory Valuation Method will determine how the Inventory Valuation Report looks.

 

FIFO

When running the Inventory Valuation Report for a company calculating valuation by FIFO, there will be one line item per Stock Site for each SKU, resulting in multiple line items per SKU.

 

Average Cost

When running the Inventory Valuation Report for a company calculating valuation by Average Cost, there will be one line item per SKU, per Stock Site, with an Average Cost for the total quantity in each Stock Site.

 

Negative Inventory

Best practice is never to sell into negative. Before completing a sales transaction, Inventory Coverage should always be managed such that the sale will not cause your Inventory to go negative. However, occasionally you may find yourself selling into the negative. FIFO and Average Cost handle negative inventory differently.

REMEMBER! No matter which Inventory Valuation Method you choose, ignoring negative quantities gets very messy for your accounting very quickly. It’s important to run your Negative Quantities Report and review Inventory Replenishment daily to make sure you can resolve inventory movement issues and negative quantities before they cause long term issues for balancing your books.

FIFO

When you sell into negative under FIFO, LOU will post a negative amount to COGS. Correcting the negative will require two steps: transfer or receive quantity into the correct Stock Site to resolve the negative quantity. These transactions will post to COGS, resolving the imbalance.

Average Cost

When you sell into negative under Average Cost, LOU will post to COGS as zero and these negative transactions will be tracked by LOU internally. Once the Inventory quantities have been appropriately updated, LOU will post the correct amount to COGS for the oldest negative quantity transaction first.

 

Stock Transfers

When you perform a Stock Transfer, you are not adding quantity to your company. You are moving existing quantity from one Stock Site to another. This is an important process to correct negative quantities. This is handled differently, depending on the Inventory Valuation Method chosen

FIFO

When performing a Stock Transfer under FIFO, LOU will move the quantity from one Stock Site to another, but it does not post to COGS. Consult your accountant to take appropriate action to resolve the COGS amount.

Average Cost

When performing a Stock Transfer under Average Cost, LOU will move the quantity from one Stock Site to another, and the zero COGS will be updated.

 

Stock Adjustments

A Stock Adjustment will add or subtract quantity without going through the buying or selling processes. This process is useful when you aren’t buying or selling inventory and you need to adjust quantities. Stock Adjustments are also performed through the Physical Count process.

FIFO

When performing a Stock Adjustment, LOU will use the current default Vendor Cost and post to COGS and Inventory Asset.

Average Cost

When performing a Stock Adjustment, LOU will use the default Vendor Cost and post to COGS and Inventory Asset.

 

Return Sales Transactions

You can perform returns through either LOU Retail POS or by creating a Return Sales/Work Order in LOU Web. How those transactions post to the GL varies.

FIFO

When Inventory is returned, the quantity is updated in the Stock Site associated with the transaction. When the Return is created through LOU Retail POS using the By Receipt or By Customer options, LOU will post to the GL using the appropriate Cost associated with the original sale.

When creating a Return transaction through LOU Retail POS without using the Return button, the transaction will simply be a negative transaction, and LOU will not look at the original transaction for Cost. LOU will use the current default Vendor Cost to post to the GL.

When you create a Return Sales or Work Order in LOU Web, LOU will use the current default Vendor Cost to post to the GL once Invoiced.

Average Cost

When Inventory is returned, the quantity is updated in the Stock Site associated with the transaction. Whether the Return originates in LOU Retail POS or LOU Web, LOU will use the default Vendor Cost to post to the GL.