Question

1. Describe the purpose of cost flow assumptions.

Answer 1

Solution. An organization operating business needs to budget various activities to be undertaken to produce goods and services to meet objectives effectively and efficiently. Cost flow represents an organization's movement of cash through various activities or transactions during an accounting period.

Purpose of cost flow assumptions are discussed below:

a. It facilitates primarily in calculation of inventory and monitoring changes.

b. It facilitates in determining and assigning costs to inventory and reported timely or updated as cost of goods sold during an accounting period.

c. It facilitates organization's management to face inflation or deflation while reporting financial statements at the end of an accounting period and also facilitates in decision making for an organization to grow.