In general, businesses buy inventory in bulk at various intervals during their accounting cycle. Rarely, do they pay the same amount for each order. Prices fluctuate so businesses will have to account for price fluctuations in their financial records. Cost flow methods is used to assign costs to inventory sold. If merchants just paid one price for all the items they purchased then we would not have to worry about cost flow methods as all items will have the same price.

It is important to note that the cost flow methods refers to how we assign cost to inventory sold and does not refer to the physical flow of goods.

There are 4 methods used to assign costs to inventory sold namely:

• Specific Identification
• First in First Out
• Last In Last Out
• Weighted average