The methods of determining which units were sold and which are on hand are referred to as Cost Flow Assumptions.

 

There are four major alternative cost flow assumptions:

Specific Identification:

In this method each item is ‘tagged' in some way and accounted for.

First in First Out (FIFO):

i.e. oldest goods are sold first, obviating old, tattered inventory. Akin to flow of goods on a conveyor belt. Quite practical and makes sense.

 

Weighted Average:

Used where bulk or liquid goods mix in storage e.g. petrol/ coal. So older stock @25/litre and later ones at 26/- which get mixed in the common storage tank, are averaged at Rs. 25.50 per litre.

 

Last in First Out (LIFO):

It assumes that last goods received, are nearest the hatch and are sold first, like goods piled up and sold off the top of the pile eg. coal. It is logical and is becoming increasingly popular, with a shift from FIFO to LIFO.