What does 'inventory valuation' determine in financial reporting?

Inventory valuation plays a crucial role in financial reporting as it establishes the worth of the inventory that a company holds at the end of an accounting period. This valuation directly impacts the financial statements, particularly the balance sheet, where assets are reported. Accurate inventory valuation ensures that the assets reflect true economic value, enabling stakeholders to make informed decisions about the company's financial health.

This process is essential for determining not only the financial position of the business but also for calculating the cost of goods sold, which influences profitability. However, the primary focus of inventory valuation is indeed to establish the carrying amount of inventory, reflecting its true current economic value as required by accounting standards. This makes it pivotal for both internal management analysis and external reporting to investors and creditors.