What is cost flow? Cost flow is the order in which costs were incurred when using, producing, or disposing of an entity.
The order of cost flow can be either ascending (from low to high) or descending (from high to low). In this article we will discuss the difference between them and how they are used.
The order of cost flow should be used when evaluating the profitability, liquidity, or solvency of a company. The descending order is most often used because it shows the company’s decreasing ability to pay off its debts;
an ascending order may not show negative values if there are no expenses incurred in that period. Ascending Order: What does this mean?
Costs start with fixed assets such as buildings and machinery and then move on to inventory items which need more time before they can produce revenue for their owners (usually taking three months).
Operating costs are next followed by other expenses such as depreciation and interest expense. Finally, any remaining amounts go towards taxes due at year-end. Descending Order: This type