Do you think it is necessary to have as many different valuation and flow assumptions as we have? Why or why not?
Cost Flow Assumptions:
1 Merchandise are purchased from time to time according to the requirements of production. It is likely that inventories are purchased during the fiscal year in different lots and at different prices. Therefore the following two problems need to be handled.
(a) which of the cost prices should be charged to different issues of inventory and which cost price should be charged to cost of goods sold in income statement.
(b) Which cost price should be assigned to inventory for valuation and presentation on Balance sheet.
The actual physical flow of inventory and cost flow assumption applied may be different. The specific identification of different cost prices of purchases and sales is most realistic method but but it is not practical as several difficulties may encounter in actual implementation of this method. The method can be successfully applied if it is possible to separate specific items and they are easily distinguishable. In specific identification method cost of goods sold and ending inventory would be calculated as shown in the following illustration.
Assume that following transactions are made during Jan 2006
Purchases cost Sales Balance
Beginning Inventory 1000 $3.00 1000.00
Jan 2 Purchases 4000 4.00 5000.00
Jan 20 Purchase 10000 5.00 15000.00
Jan 25 Sales 8000 7000.00
Jan 30 Purchase 4000 6.00 11000.00
Specific Identification Method
Details No of units Unit cost Total cost
Beginning Inventory 200 $3.00 $600
Jan 2 Purchases 1800 4.00 $7,200
Jan 20 Purchase 7000 5.00 $35,000
Jan 30 Purchase 2000 6.00 $12,000
Ending Inventory 11000 $54800
Beginning Inventory $3,000.00
Cost of Goods available for sale $93,000.00
Less: Ending Inventory ...
Yes, and several cost flow assumptions are discussed to support the response. Whether it is necessary to have as many different valuation and flow assumptions as we have is determined.