An assumption that determines the order in which costs should flow out of a balance sheet account (e.g. Inventory, Investments, Treasury Stock) when the item is sold. For an illustration of the cost flow assumption, see...
An assumption that determines the order in which costs should flow out of a balance sheet account (e.g. Inventory, Investments, Treasury Stock) when the item is sold. For an illustration of the cost flow assumption, see...
See first in, first out (FIFO).
The method used for removing costs from the inventory of goods. The cost flow can be different from the physical flow of goods. For example, in the U.S. the LIFO cost flow can be used even if the oldest goods are shipped...
Used in the periodic inventory method to compute the value of inventory and the cost of goods sold. This average cost is based on the total cost of goods available for sale for the entire year (after all purchases for...
. (If specific identification is used, there is no need to make an assumption.) FIFO, LIFO, average are assumptions because the flow of costs out of inventory does not have to match the way the items were physically...
This is the expression for replacement cost, which is not an acceptable cost flow, since it violates the cost principle. However, an economist and decision makers would argue that the cost to replace the item is the...
Why do companies use cost flow assumptions to cost their inventories? Cost flow assumptions are necessary because of inflation and the changing costs experienced by companies. If costs were completely stable, it...
Generally, this rule requires that the cost flow assumption used for tax purposes be the same cost flow assumption used for the financial statements. Consult a tax professional about this and other tax matters.
What is FIFO? Definition of FIFO In accounting, FIFO is the acronym for First-In, First-Out. It is a cost flow assumption usually associated with the valuation of inventory and the cost of goods sold. Under FIFO, the...
Why does LIFO usually produce a lower gross profit than FIFO? Definition of LIFO LIFO (which is the acronym for Last In, First Out) is a cost flow assumption in which the most recent costs of inventory items are the...
What is LIFO? Definition of LIFO LIFO is the acronym for last-in, first-out, which is a cost flow assumption often used by U.S. corporations in moving costs from inventory to the cost of goods sold. Under LIFO, the most...
will be __________. Select... overstated understated 21. The inventory cost flow that results in the most recent costs being matched first with sales of the current accounting period is __________. Select... FIFO LIFO...
assumption is needed. inventory This current asset reports a retailer’s or manufacturer’s goods on hand at its cost (or lower). Because the unit costs change, a cost flow assumption is needed. Mark as wrong Mark as...
this with the following example. Example of LIFO Layers Jay Corp. began operations in 2021 using the LIFO cost flow assumption. It ended the year 2021 with 10 units in inventory at a cost of $20 each. Therefore, its...
A cost flow assumption where the first (oldest) costs are assumed to flow out first. This means the latest (recent) costs remain on hand. To learn more, see Explanation of Inventory and Cost of Goods Sold.
A cost flow assumption where the last (recent) costs are assumed to flow out of the asset account first. This means the first (oldest) costs remain on hand. To learn more, see Explanation of Inventory and Cost of Goods...
of $2,500. Since the unit cost of items purchased or produced may be increasing with inflation, the costs used for inventory reporting will be based on a cost flow assumption. For example, the FIFO cost flow assumption...
direct materials, direct labor, and manufacturing overhead. Manufacturers are also required to consistently follow their selected cost flow assumption. Examples of Inventory Valuation Assume that a new company purchased...
See weighted-average cost flow assumption and moving-average cost of inventory.
See next-in, first-out cost flow assumption (NIFO).
What is a LIFO Reserve? Definition of LIFO Reserve The LIFO reserve is a contra inventory account that indicates the difference between the following: Inventory cost reported on the balance sheet under the LIFO cost flow...
the physical flow of the goods being removed from the warehouse). Cost Flow Assumptions When the costs of the items in inventory are changing, a cost flow assumption must be made. If a company elects to first flow the...
this topic by reading our Inventory and Cost of Goods Sold (Explanation). 1. Under which inventory cost flow assumption is the cost of the most recent purchase matched first with sales revenues? FIFO Wrong. Under FIFO...
The last-in, first-out cost flow assumption under the perpetual inventory system. The last (most recent) costs as of the time that goods are sold are the first costs removed from inventory. The oldest costs as of the...
A quality of accounting information that facilitates comparing a company’s reporting of one accounting period to another. For example, the reader of a company’s financial statements can assume that the...
its inventory items, and at the same time use the last-in, first-out (LIFO) cost flow assumption. (In periods of inflation LIFO means the higher/recent costs will be moved to the cost of goods sold while the...
of the items sold (and the account Cost of Goods Sold is debited Has a continuously or perpetually changing balance because of the above entries Requires a physical inventory to correct any errors in the Inventory...
principle, the cost flow assumption, consistency, and other accounting concepts and principles. When a company elects the LIFO cost flow assumption, it chooses to put its most recent costs in the cost of goods sold, and...
. The actual unit costs must be consistent with the cost flow assumption (FIFO, weighted-average, etc.) that was elected by the company. Special attention is required for items that are on consignment or are in transit....
What is the effect on financial ratios when using LIFO instead of FIFO? Definition of Effect of LIFO Instead of FIFO During periods of significantly increasing costs, the LIFO cost flow assumption instead of the FIFO...
__________–__________, __________–__________. 7. LIFO means __________ – __________, __________ – __________. 8. The cost flow assumption where the most recent costs are matched first with current period sales...
What is NIFO? NIFO is the acronym for next-in, first-out. NIFO is a cost flow assumption, just as FIFO and LIFO are cost flow assumptions. However, NIFO is not acceptable for financial reporting since it calls for a...
Also referred to as illusory profits. Occurs because accountants use past costs rather than replacement costs. For example, in computing the cost of goods sold accountants often use the FIFO cost flow assumption. This...
The dollar amount associated with the goods in a company’s inventory. Initially the cost per unit is the cost to get the inventory items in place and ready for use. However, under certain circumstances the cost may...
A current asset whose ending balance should report the cost of a merchandiser’s products awaiting to be sold. The inventory of a manufacturer should report the cost of its raw materials, work-in-process, and...
with significant amounts of inventory and plant assets. For example, when inventory is measured by using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is...
be combined, such as raw materials and supplies, or raw materials and work-in-process. In addition, a manufacturer (and others with inventory) should disclose the method for valuing the inventory. This includes whether...
refers to consistency as one of the characteristics or qualities that makes accounting information useful. Example of Consistency Let’s assume that a U.S. corporation uses the FIFO cost flow assumption for valuing its...
How does inflation affect the cost of goods sold? Inflation and the Cost of Goods Sold Generally speaking, a company selling goods during periods of inflation will see an increase in its cost of goods sold. When and by...
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