Cost Flow Assumptions

Cost flow assumptions are accounting methods used to determine which inventory costs are assigned to cost of goods sold and remaining inventory when inventory is sold or used. Because actual flow often differs from accounting methods, businesses choose among methods like FIFO (first-in, first-out), LIFO (last-in, first-out), or Weighted Average. FIFO assumes oldest inventory is sold first, while LIFO assumes newest inventory is sold first. These choices impact financial statements, especially in times of inflation or deflation, affecting profit margins and taxable income.