Question

Which of the following is (are) true regarding cost flow assumptions?

1) Manufacturing firms are required to use FIFO.
2) Service firms are required to use LIFO.
3) If a firm uses FIFO for tax purposes, then FIFO must be used for financial reporting purposes.
4) If a firm uses LIFO for tax purposes, then LIFO must be used for financial reporting purposes.
5) All of these.

Answer 1

The true statements about cost flow assumptions are that if a firm uses FIFO or LIFO for tax purposes, they must also apply the same method for financial reporting. Manufacturing is not mandated to use FIFO, nor are service firms mandated to use LIFO. Correct option is 3)

Step-by-step explanation:

The correct statements regarding cost flow assumptions are as follows: 3) If a firm uses FIFO for tax purposes, then FIFO must be used for financial reporting purposes, and 4) If a firm uses LIFO for tax purposes, then LIFO must be used for financial reporting purposes. Manufacturing firms are not specifically required to use FIFO, nor are service firms specifically required to use LIFO. These cost flow assumptions are part of inventory accounting practices which allow businesses to manage and report their inventory and cost of goods sold in various ways.