Question

1. Provide two reasons why cost flow assumptions should be eliminated in modern times

2. Provide two reasons why this method should continue

Answer 1

Cost flow assumption should be eliminated because -

1) It does not give the actual flow of goods as some company may use LIFO (Last In First Out) where they will sale the product which last bought wihile some company will use FIFO (First In First Out) where they will what is bought first.

2) Also due to different method available and used , company uses the method which will minimize the profit to decrease the income tax whereas some company maximise the profit to increase the share value.

3) Also due to different methods consistency is not available within different companies due to different methods used.

Cost flow assumption should continue because -

1) It takes into consideration the inflation and the changing cost of the product which is paid by the company.

2) Because of physical flow of inventory it is very difficult to value each inventory . So to determine the value of the product , the cost at which you bought it, at the time of sale cost flow assumption is required.

3) It is used in accounting to balance out cost at the end of the year , where cost of goods sold plus the cost of goods left in inventory must be equal to total cost of inventory for the year.