Why is a cost flow assumption used?
A)This is a systematic method for allocating costs between beginning inventory and ending inventory.
B)This is a systematic method for allocating costs between cost of goods available for sale and ending inventory.
C)This is a systematic method for allocating costs between cost of goods sold and ending inventory.
D)This is a systematic method for allocating costs between cost of goods manufactured and cost of goods sold.

Question

Quizplus · Accepted Answer

Cost flow assumptions are used to allocate costs between cost of goods sold and ending inventory. This is important for determining the cost of goods sold and gross profit on an income statement for a specific period of time. Choice A is incorrect because cost flow assumptions do not specifically allocate costs between beginning and ending inventory, but rather between cost of goods sold and ending inventory. Choice B may seem plausible, but it is incorrect because cost of goods available for sale includes both beginning inventory and purchases, while cost flow assumptions only allocate costs based on the flow of inventory. Choice D is incorrect because it refers to allocating costs between cost of goods manufactured, which is not relevant to the allocation of costs in inventory accounting.

Why Is a Cost Flow Assumption Used