Which inventory valuation method tends to overestimate inventory values?

The FIFO (First-In, First-Out) inventory valuation method tends to overestimate inventory values, especially during periods of rising prices. Under this method, the oldest costs are assigned to the cost of goods sold first, meaning that the most recent (and typically higher) costs associated with inventory remain in ending inventory. As a result, the ending inventory reflects higher current market values, leading to an overestimation of inventory value on the balance sheet.

This overestimation can impact financial metrics such as net income and asset valuations, as higher inventory values can lead to increased reported profit margins. The method ensures that older inventory costs are matched against revenues, which can become less representative of current market conditions when prices are on an upward trend. This distinguishes FIFO's financial implications from other methods, which may provide a different perspective on inventory valuation based on their specific approaches to cost matching and inventory flow.