Flow of goods assumptions

FLOW OF GOODS ASSUMPTIONS So far we have ignored any problems in attaching a ‘cost’ to each stock item. Companies generally keep records showing the invoice price of each item purchased. The unit costs on the most recent invoice may be used to value stock, but what if the closing stock level exceeds the quantity of items purchased on the most recent invoice? Or what if the price of an item fluctuates sharply or continually increases, as happens in periods of rapid inflation? To deal with these issues a company must establish a policy which will affect both the balance sheet stock figure and the profit or loss.