Asked by Anisha Bagga on Jul 25, 2024
Verified
Describe three inventory cost flow assumptions and how they impact the financial statements.
Inventory Cost Flow
The process of accounting for the costs associated with the goods throughout the stages of inventory, from raw materials to sold products.
Financial Statements
Documents that report on a company’s financial performance, position, and cash flows, giving insight into its financial health.
Assumptions
Predetermined notions or beliefs influencing the understanding or analysis of data or events.
- Develop the capacity to understand and execute calculations using diverse inventory accounting methods, like FIFO, LIFO, and Average cost.
- Analyze the effects that inventory valuation methods have on the expense of goods sold, final inventory amounts, and gross profit margins.
Verified Answer
2. Cost flow is in the reverse order in which costs were incurred or last-in, first-out (LIFO). The last units purchased are assumed sold, so the newest costs flow to the income statement and the cost of the oldest purchases are on the balance sheet.
3. Cost flow is an average of the costs. Under the average cost method, all units are assigned the same average cost for the period.
Learning Objectives
- Develop the capacity to understand and execute calculations using diverse inventory accounting methods, like FIFO, LIFO, and Average cost.
- Analyze the effects that inventory valuation methods have on the expense of goods sold, final inventory amounts, and gross profit margins.
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