Which inventory valuation method is primarily linked to the principle of cost flow assumptions?

The FIFO (First-In, First-Out) inventory valuation method is primarily linked to the principle of cost flow assumptions because it assumes that the oldest inventory items are sold first. This approach aligns the flow of costs with the physical flow of inventory in many businesses, particularly those involving perishable goods or items that have a tendency to become outdated.

Under FIFO, the cost of goods sold (COGS) reflects the cost of the earliest purchased items, leading to a balance sheet that showcases the more recent purchase costs in the ending inventory. This is particularly relevant in times of rising prices, as it can result in a lower COGS and higher net income, which is an important consideration for financial reporting and tax purposes.

The principle of cost flow assumptions is crucial to ensure that a company's financial statements accurately reflect its inventory costs and profit levels, making FIFO a favored method in many industries. Other methods like LIFO or weighted average also involve cost flow assumptions but result in different financial implications and inventory evaluations.