diff --git a/erpnext/stock/report/incorrect_serial_no_valuation/test_incorrect_serial_no_valuation.py b/erpnext/stock/report/incorrect_serial_no_valuation/test_incorrect_serial_no_valuation.py
new file mode 100644
index 00000000000..81f736928fe
--- /dev/null
+++ b/erpnext/stock/report/incorrect_serial_no_valuation/test_incorrect_serial_no_valuation.py
@@ -0,0 +1,81 @@
+# Copyright (c) 2026, Frappe Technologies Pvt. Ltd. and Contributors
+# See license.txt
+
+import frappe
+
+from erpnext.stock.doctype.item.test_item import make_item
+from erpnext.stock.doctype.stock_entry.stock_entry_utils import make_stock_entry
+from erpnext.stock.report.incorrect_serial_no_valuation.incorrect_serial_no_valuation import execute
+from erpnext.tests.utils import ERPNextTestSuite
+
+SERIAL_ITEM = "_Test Serialized Item With Series"
+WAREHOUSE = "Stores - _TC"
+
+
+class TestIncorrectSerialNoValuation(ERPNextTestSuite):
+	def run_report(self, **extra):
+		filters = frappe._dict({"company": "_Test Company"})
+		filters.update(extra)
+		return execute(filters)[1]
+
+	def test_healthy_serial_item_not_flagged(self):
+		make_stock_entry(
+			item_code=SERIAL_ITEM,
+			to_warehouse=WAREHOUSE,
+			qty=3,
+			rate=100,
+			posting_date="2026-06-01",
+		)
+		make_stock_entry(
+			item_code=SERIAL_ITEM,
+			from_warehouse=WAREHOUSE,
+			qty=1,
+			posting_date="2026-06-02",
+		)
+
+		data = self.run_report(item_code=SERIAL_ITEM)
+
+		flagged_items = {row.get("item_code") for row in data if isinstance(row, dict)}
+		self.assertNotIn(SERIAL_ITEM, flagged_items)
+
+	def test_only_balance_row_when_filtered_to_healthy_item(self):
+		make_stock_entry(
+			item_code=SERIAL_ITEM,
+			to_warehouse=WAREHOUSE,
+			qty=3,
+			rate=100,
+			posting_date="2026-06-01",
+		)
+
+		data = self.run_report(item_code=SERIAL_ITEM)
+
+		# The report always appends a single "Balance" summary row. A healthy
+		# serial item contributes no detail rows, so only that summary remains.
+		self.assertEqual(len(data), 1)
+		self.assertEqual(data[-1].get("qty"), 0)
+		self.assertEqual(data[-1].get("valuation_rate"), 0)
+
+	def test_mismatched_in_out_valuation_is_flagged(self):
+		# fresh serial item so only this test's serial movements are considered
+		item = make_item(
+			properties={"is_stock_item": 1, "has_serial_no": 1, "serial_no_series": "ISV-BAD-.#####"}
+		).name
+
+		make_stock_entry(item_code=item, to_warehouse=WAREHOUSE, qty=1, rate=100, posting_date="2026-06-01")
+		serial_no = frappe.get_all("Serial No", filters={"item_code": item}, pluck="name")[0]
+		make_stock_entry(item_code=item, from_warehouse=WAREHOUSE, qty=1, posting_date="2026-06-02")
+
+		# corrupt the outgoing valuation so the serial's in (100) and out no longer cancel:
+		# net qty is 0 but a residual value remains, which the report must flag
+		frappe.db.set_value(
+			"Serial and Batch Entry",
+			{"serial_no": serial_no, "qty": ["<", 0]},
+			"incoming_rate",
+			60,
+			update_modified=False,
+		)
+
+		data = self.run_report(item_code=item)
+
+		flagged_serials = {row.get("serial_no") for row in data if isinstance(row, dict)}
+		self.assertIn(serial_no, flagged_serials)