What is the difference between the flow of costs and the physical flow of goods?
Flow of costs refers to the assumption that is made for the purpose of determining the cost of inventory items that are sold when preparing financial statements. The cost flow assumption that a business makes may have nothing to do with the actual flow of inventory into and out of the business. The physical flow of goods refers to the actual timing of when goods are sold. For example, a grocery store may use a FIFO cost flow assumption for financial statement purposes and this may reflect the physical flow of some inventory items but not others. The grocer will put the newer items at the back on the shelf and pull the oldest items to the front for the customer to purchase (FIFO) but the customer may look for the freshest item at the back of the shelf (e.g. milk) to purchase (LIFO).
More Questions Accounting Chapter 5:
- What is the difference between the flow of costs and the physical flow of goods?
- In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
- In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
- What are some advantages and disadvantages of using the FIFO method of inventory valuation?
- What are some advantages and disadvantages of the specific identification method of accounting for inventory?
- What is the effect on the accounting equation of recognizing uncollectable accounts expense?
- What is the net realizable value of receivables?
- What is the difference between accounts receivable and notes receivable?