Matching principle bad debts1/21/2024 Ending inventory = average cost x units of ending inventory.Average cost = (beginning inventory + purchases) / units available for sale.This is the only method in which all units are assigned the same (average) per-unit cost. Using the weighted average cost method, the average cost of all units in the inventory is computed and used in recording the cost of goods sold. The cost flow assumption may or may not reflect the physical flow of inventory. They should be applied only to an inventory of homogeneous items. The remaining three methods are referred to as cost flow assumptions under GAAP and cost formulas under IFRS. In most cases, companies may be unable to determine exactly which items are sold and which items remain in ending inventory. However, the method becomes cumbersome and may produce misleading results if the inventory consists of homogeneous items. (Debit Cost of Goods Sold Credit Inventory.) This method achieves the proper matching of sales revenue and cost of goods sold when the individual units in the inventory are unique. Using the specific identification method, the actual costs of the specific units sold are transferred from inventory to the cost of goods sold. In some cases, it's possible to specifically identify which inventory items have been sold and which remain. If abused, this principle permits the balance sheet to become a "dumping ground" for unmatched costs. ![]() However, matching permits certain costs to be deferred and treated as assets on the balance sheet when in fact these costs may not have future benefits. For costs that are not directly related to revenues, accountants must develop a "rational and systematic" allocation policy that will approximate the matching principle. The problem of expense recognition is as complex as that of revenue recognition. When the revenues are recognized in future periods, the asset is converted to expenses in those periods.
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