A company should determine cost for inventory purposes by the inventory cost flo

Question

A company should determine cost for inventory purposes by the inventory cost flow method most clearly reflecting its periodic income. Required: (1) Explain the fundamental cost flow assumptions of the average cost. FIFO and LIFO inventory cost flow methods.(2)Discuss the reasons a company uses LIFO in an inflationary economy. (3) Where there is evidence that the utility of goods in their disposal in the ordinary course of business will be lest than cost . Explain the proper accounting treatment and under what concept that treatment is justified?

Explanation / Answer

A calculation used by companies to monitor inventory goods. The average cost flow assumption is one of a variety of cost flow assumption methods used to determine the cost of goods sold (COGS) and ending inventory. Companies use one or more methods to make certain assumptions regarding which goods have been sold and which remain in inventory. Also called "weighted average cost flow assumption". Investopedia explains 'Average Cost Flow Assumption' The average cost flow assumption assumes that all goods of a certain type are interchangeable and only differ in purchase price. The purchase price differentials are attributed to external factors including inflation, supply or demand. Under average cost flow assumption, all of the costs are added together, then divided by the total number of units that were purchased. The number of units sold can be multiplied by the average price per unit to establish the cost of goods sold and the ending inventory.

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