Question

What are three major cost flow assumptions used by U.S. companies in valuing inventory?

a. FIFO, LIFO, average cost.
b. FIFO, LIFO, double-declining balance.
c. FIFO, LIFO, average market.
d. FIFO, LIFO, actual cost.

Answer 1

The three major cost flow assumptions used in the U.S. for inventory valuation are FIFO, LIFO, and average cost. These methods impact financial reporting and can lead to different tax implications. Understanding their effects on cost of goods sold and inventory is crucial for accurate financial analysis.

Step-by-step explanation:

The three major cost flow assumptions used by U.S. companies in valuing inventory are: FIFO (First In, First Out), LIFO (Last In, First Out), and average cost. The choice among these inventory valuation methods affects the cost of goods sold and ending inventory figure reported in the financial statements.

FIFO assumes that the oldest items are sold first, while LIFO assumes the most recently acquired items are sold first. The average cost method assigns an average cost to each unit sold by dividing the total cost of goods available for sale by the total units available for sale. These assumptions are important for financial reporting and tax purposes, and they can have significant effects on reported profitability and inventory valuation.

Understanding the interplay between various costing methods like fixed cost, marginal cost, average total cost, and average variable cost provides valuable insights for a firm. Each of these has a distinctive pattern, and the numerics behind these can vary based on the specific circumstances of the firm.