Answered: Question Why does the application of…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter9: Operating Activities

Section: Chapter Questions

Problem 7QE

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Why does the application of the FIFO, Average cost, SpecificIdentification, and LIFO cost flow assumptions produce differentamounts for the cost of ending inventory and the cost of goodssold?

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Step 1: Definition

Inventory cost flow assumptions:

These are the methods used by the companies to compute the cost assigned to inventory from the time inventory is bought to the time inventory is sold. First-in-First out (FIFO), Last-in-First out (LIFO) and average assumptions are such examples.

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