Question

Why are cost flow assumptions used to determine inventory valuations? Define and explain the rationale for using each of the cost flow assumptions. In your opinion, given the advances in computing technology, are cost flow assumptions still necessary in current times?

Answer 1

The cash flow assumptions states that a cost of inventory item changes from when it accuried or built and when it is sold.Because of this cost differential,management needs a formal system for maintaining inventory by their cost.

Cost flow assumptions are:

1.FIFO cost flow assumptions.Under this method,it is assumed that the items purchased first will be sold first.

2.LIFO cost flow assumptions. Under this method,it is assumed that the items purchased latest will be sold first.

3.Weighted average cost flow assumption.Under this method,the cost goods sold will be average of all units price.

In the advance computing technolgy,each item is marked with its purchase value and sold accordingly.