Fundamental Fist Flow Assumptionss Of The Average Cost-Flow Methods

Decent Essays

a) Describe the fundamental cost-flow assumptions of the average cost, FIFO, and LIFO inventory cost-flow methods.
The average cost is the combination of the FIFO and LIFO method. It focuses more on necessity of periodic representation of inventory instead of focuses on some series of transactions. According to “all the transactions during an accounting period are viewed as reflecting the period as a whole rather than as reflecting individual transactions” (Schroeder, Clark & Cathey, 2017). Therefore, under the average method, the financial statements should reflect the operations of a period as a whole rather than some series of transactions.
The first in, first out method is based on assumption that the actual merchandise flow all the way through enterprise. Under this method the items which were first bought should be sold first. It is the most appropriate method for perishable items. For example, a food item which is bought a week ago should be sold first otherwise it would either expire or spoil.
The last in, first out method is based on assumption that current cost and revenue should match. Under this method, the items recorded last should be issued first. Since the last items are sold first, the income will not be inflated and the tax payment will be lower under this method. It has been mentioned in Investopedia that 90% of supermarkets and majority of drug stores use the LIFO method (Tun, 2015).
b) Discuss the reasons for using LIFO in an inflationary economy.

Get Access