Cost Flow Assumptions Explained: FIFO, LIFO, and Weighted Average

In this video, we cover cost flow assumptions such as FIFO, LIFO and weighted average. ✔️Accounting students or CPA Exam candidates: 👉https://farhatlectures.com/ start your free trial Cost Flow Assumptions: FIFO, LIFO, and Weighted Average Cost flow assumptions are accounting methods used to determine the cost of goods sold (COGS) and ending inventory under various inventory management systems. The three main cost flow assumptions are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average Cost. 1. FIFO (First-In, First-Out): Under FIFO, the oldest inventory items purchased are considered sold first, and the newest inventory remains in stock. Advantages: Provides a higher ending inventory value during periods of rising prices. Matches older, lower-cost inventory with current sales, resulting in lower COGS and higher net income. Disadvantages: Higher taxes due to higher net income. May not reflect the actual physical flow of goods. 2. LIFO (Last-In, First-Out): Under LIFO, the newest inventory items purchased are considered sold first, and the oldest inventory remains in stock. Advantages: Reduces taxable income in periods of rising prices by assigning higher costs to COGS. Provides better matching of current costs with current revenues. Disadvantages: Lower ending inventory value during inflationary periods. Not permitted under IFRS; only allowed under GAAP. 3. Weighted Average Cost: The Weighted Average Cost method assigns a uniform cost to all units by averaging the cost of all inventory purchases. Advantages: Smooths out price fluctuations. Reduces the impact of extreme cost variations. Disadvantages: Does not reflect actual physical flow of goods. May not be as accurate in periods of volatile prices. Conclusion: The choice of cost flow assumption impacts the financial statements, including COGS, net income, and tax liability. FIFO is ideal in periods of rising prices for higher profits, LIFO reduces taxes by increasing COGS, and Weighted Average provides stability in price fluctuations. The selection of the appropriate method depends on financial objectives, tax considerations, and compliance requirements. #cpaexam #accountingtutorial #accounting