Cost Flow Assumption

Cost flow assumption refers to the accounting method used to assign the cost of inventory items sold and remaining at the end of a period. Since actual inventory costs may not match the physical flow of goods, businesses choose assumptions like First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Average Cost to estimate costs. These assumptions help determine gross profit and taxable income, influencing financial statements. While inventory physically may not follow the assumed flow, these methods provide consistent, systematic ways to match costs with revenues across accounting periods.