As you mentioned, there are several cost flow assumptions, such as FIFO and weighted average, that a company might use, which will have a direct impact on the ending value of inventory as well as the cost of goods sold.

What are other cost flow assumptions that companies might use? Can a company change from one cost flow assumption to another whenever they wish? Explain your thoughts.

Question

19-07-2024
Business

Answered

As you mentioned, there are several cost flow assumptions, such as FIFO and weighted average, that a company might use, which will have a direct impact on the ending value of inventory as well as the cost of goods sold.

What are other cost flow assumptions that companies might use? Can a company change from one cost flow assumption to another whenever they wish? Explain your thoughts.

Answer :

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Final answer:

Companies can use LIFO and Specific Identification cost flow assumptions in addition to FIFO and Weighted Average, and changing cost flow assumptions requires disclosure and can impact financial statements.

Explanation:

Other than FIFO and Weighted Average, companies may also use the Last In, First Out (LIFO) and Specific Identification cost flow assumptions. LIFO assumes that the most recent inventory purchased is sold first. Specific Identification involves individually tracking the cost of each item sold.

Companies can change from one cost flow assumption to another, but it requires disclosure in their financial statements. The change must be justified and can impact financial statements and taxes.

Cost flow assumptions play a vital role in determining inventory valuation and cost of goods sold, influencing financial results and tax implications for companies.

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