COST FLOW ASSUMPTIONS
Discuss with your colleagues the cost flow assumptions presented in these statements. Why did the company choose these assumptions? What types of inventories did they report?
Locate the annual financial report you selected in Week 1. Look at the balance sheet and the notes to the financial statements (particularly Note 1).
Post at least 200 words addressing the following points:
What cost flow assumption did the report use? Why do you think the company selected this cost flow assumption?
How many different types of inventories did the company report on its balance sheet? Identify those inventory categories.
Would the company be required to account for its inventories differently if it were reporting under IFRS? Why or why not?
Sample Solution
The financial statement I selected in Week 1 uses the first-in, first-out (FIFO) cost flow assumption. This means that goods are treated as being sold from inventory in the order that they were acquired, with the oldest goods being recorded as sold or consumed first. The company chose to use this method because it is generally considered to be more accurate than other methods, such as last-in, first-out (LIFO), in reflecting sales and profits. Additionally, FIFO may provide a better picture of what current market values are for inventory items.
The financial statement I selected in Week 1 uses the first-in, first-out (FIFO) cost flow assumption. This means that goods are treated as being sold from inventory in the order that they were acquired, with the oldest goods being recorded as sold or consumed first. The company chose to use this method because it is generally considered to be more accurate than other methods, such as last-in, first-out (LIFO), in reflecting sales and profits. Additionally, FIFO may provide a better picture of what current market values are for inventory items.
The balance sheet reported two different types of inventories – “raw materials” and “finished goods”. Raw materials represent unfinished products used during production processes while finished goods consist of completed products ready for sale or distribution.
The company would not be required to account for its inventories differently if it were reporting under IFRS since both GAAP and IFRS require the use of either FIFO or LIFO when accounting for inventories. However, some companies may choose to report using an average cost method instead depending on their specific needs and objectives.