Principles of Financial Accounting · free preview
Inventory Valuation Methods and Cost Flow Assumptions
When identical units carry different costs, GAAP offers four cost flow assumptions, specific identification, FIFO, LIFO, and weighted average, each producing a different split of cost between ending inventory and cost of goods sold.
1. The cost assignment problem
The cost assignment problem
2. The four methods defined
The four methods defined
3. Why the choice matters
Why the choice matters
4. What the methods share
What the methods share
5. Physical versus cost flow
What does a cost flow assumption describe?
6. FIFO in rising costs
In a period of rising purchase costs, which statement about FIFO is correct?
7. LIFO and taxes
Why might a United States company choose LIFO during sustained inflation?
8. Specific identification fit
For which inventory is specific identification most appropriate?
9. Goods available for sale
Beginning inventory is 12,000 dollars and purchases during the period are 38,000 dollars. Compute goods available for sale in dollars, number only.
10. FIFO ending layer count
A company sells 30 of 45 available units under FIFO, leaving 15 in ending inventory. Which costs remain in ending inventory under FIFO, the oldest or the most recent?
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