Generally Accepted Accounting Principles (GAAP) require inventory to be valued at the lower of cost or market. Cost is determined by one of three methods: first-in, first-out (FIFO); last-in, first-out (LIFO); and weighted average of cost. The market value is the estimated current selling price in the ordinary course of business. Inventory can also include items that are faulty and unlikely to be sold, but must still be classified as open inventory according to GAAP guidelines. It’s essential for businesses to keep accurate records when it comes to their inventory – because failing to comply with GAAP can lead to serious legal issues.