Question

With a FIFO inventory cost flow assumption, what is assumed about the units that are sold and the units that remain in ending inventory?

Answer 1

The FIFO inventory cost flow assumption states that the earliest units purchased are the first sold, affecting the cost of goods sold and profits, particularly during inflation.

Step-by-step explanation:

With the FIFO inventory cost flow assumption, it is presumed that the first units purchased are the first sold. Therefore, the costs of the earliest units acquired are the ones used to calculate the cost of goods sold (COGS).

Conversely, the units that remain in ending inventory are assumed to be the most recent purchases, so they reflect the latest costs.

This may affect the reported profit, as during periods of inflation, FIFO can result in lower COGS and higher profits, compared to other inventory accounting methods such as LIFO (Last-In, First-Out).