Question

2. "The selection of an inventory cost flow method is a decision made by accountants." Do you agree? Explain. Once a method has been selected, what accounting requirement applies?

Answer 1

Yes. A method is simply chosen by the accountant as there are no rules dictating that a certain method must be used.They applies the following cost flow assumptions to determine reported balances for ending inventory and cost of goods sold:

Specific identification,

FIFO,

LIFO, and

Averaging.

The primary basis of accounting for inventories is cost, which is defines as the price paid or consideration given to acquire an asset. The major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues.

Specific identification reclassifies the cost of the actual unit that was sold, finding theoretical fault with that approach is difficult. Unfortunately, specific identification is nearly impossible to apply unless easily distinguishable differences exist between similar inventory items. That leaves FIFO, LIFO, and averaging. Ultimately, the numbers in financial statements must be presented fairly based on the cost flow assumption that is applied.

Further, the only requirement is that, once a method is chosen, it must be used consistently.