Cost flow assumptions is about which units were sold that most companies make assumptions to keep track of the cost of each particular item sold.
Because specific identification is often impractical, other cost flow methods are permitted. These differ from specific identification in that they assume flows of costs that may be unrelated to the physical flow of goods. There are three assumed cost flow methods:
- First-in, first-out (FIFO)
- Last-in, first-out (LIFO)
- Average cost
There is no accounting requirement that the cost flow assumption be consistent with the physical movement of the goods. Company management selects the appropriate cost flow method.