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There are three basic inventory cost flow assumptions.  What are they and how are they calculated? What is the impact of each on the balance sheet (inventory) and on the income statement (cost of goods sold) when:

  1. Prices are rising?
  2. Prices are falling?

I have an additional question. If a company is using a perpetual inventory system, why is it necessary (and it is absolutely necessary) for the company to complete a physical inventory count at least annually?

Hint: The three basic inventory cost flow assumptions are : FIFI, LIFO & Average cost