Inventory Cost Flow Assumptions

Question: Since company officials are allowed to select a cost flow assumption, which of these methods is most

typically found in the reporting of companies in the United States?

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Answer: To help interested parties gauge the usage of various accounting principles, a survey is carried out

annually of the financial statements of six hundred large companies in this country. The resulting information

allows accountants, auditors, and decision makers to weigh the validity of a particular method or presentation. For

2007, that survey found the following frequency of application of cost flow assumptions. Some companies use

multiple assumptions: one for a particular part of inventory and a different one for the remainder. Thus, the total

here is well above six hundred even though over one hundred of the surveyed companies did not have inventory or

mention a cost flow assumption (inventory was probably an immaterial amount). using multiple assumptions is especially common when a U.S. company has subsidiaries located


Inventory Cost Flow Assumptions—600 Companies Surveyed

First-in, First-out (FIFO) 391

Last-in, First-out (LIFO) 213

Averaging 155

Other 24

Interestingly, individual cost flow assumptions tend to be more prevalent in certain industries. In this same survey,

86 percent of the financial statements issued by food and drug stores used LIFO whereas only 10 percent of the

companies labeled as “computers, office equipment” had adopted this same approach. That difference could quite

possibly be caused by the presence of inflation or deflation. Prices of food and drugs tend to escalate consistently

over time while computer prices often fall as technology advances

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