Teamwork in Action (Concluded)
(c) Cost Flow versus Actual Physical Flow
Typical comments experts may express in response to (c):
• Physical flow of goods can be affected by the type of products in
Specific Identification--Always reflects the actual cost flow. Electronic
scanning has increased the ability to use this method in businesses that sell
FIFO--Most businesses try to move their older or earlier acquired inventory
first, particularly if they sell perishable goods. Therefore, FIFO will frequently
require the mixing or combining of units on hand. This is possible for
inventory such as oil but it still unlikely that the actual blending would be as
complete as the averaging of costs.
(d) Impact of Methods
Typical comments experts may express in response to (d):
Weighted Average will usually result in a reported net income and tax
consequences somewhere in between LIFO and FIFO.
Specific Identification will result in a cost of goods sold, net income and tax
expense dependent on whether the actual cost of units sold were the higher
or lower priced items.
remaining in inventory have costs similar to current replacement costs.