U.S. GAAP tends to apply standard reporting rules for many transactions to make financial statements more usable by decision makers. The application of an inventory cost flow assumption is one area where a significant variation is present. A company can choose to use specific identification, first-in, first-out (FIFO), last-in, first-out (LIFO), or averaging. Each of these assumptions determines the cost moved from inventory to cost of goods sold to reflect the sale of merchandise in a different manner. The reported inventory balance as well as the expense on the income statement (and, hence, net income) are dependent on the cost flow assumption that is selected.
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