How Accounting Choices and Estimates Affect Earnings and Balance Sheets
Assumptions about inventory cost flows provide another example of how accounting choices can affect financial reporting. Companies may assume that their purchases of inventory items are sold to customers on a first-in, first-out (FIFO) basis, with the result that the remaining inventory reflects the most recent costs. Alternatively, they may assume that their purchases of inventory items are sold to customers on a weighted-average cost basis.
