1215

	Units	Unit Price
Beginning Inventory	709	$2.00
Purchases	556	$6.00
Sales	959	$13.00
SGA Expenses	$2,649 per annum

What is gross profit using the FIFO method and LIFO method?

FIFO

LIFO

A) $6,900 $5,676

B) $6,900 $5,506

C) $6,213 $5,676

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FIFO COGS = (709 units)($2/unit) + (959 ? 709)($6/unit) = $1,418 + $1,500 = $2,918

Sales = (959 units)($13/unit) = $12,467

Gross profit = Sales ? COGS ? Expenses

= 12,467 ? 2,918 ? 2,649 = $6,900

LIFO COGS = (556 units)($6/unit) + (959 ? 556)($2/unit) = $3,336 + $806 = $4,142

Sales = (959 units)($13/unit) = $12,467

Gross profit = Sales ? COGS ? Expenses = 12,467 ? 4,142 ? 2,649 = $5,676

1215

In a decreasing price environment, the first-in first-out (FIFO) inventory cost method results in:

A) higher inventory compared to last-in first-out.

B) lower cost of goods sold compared to last-in first-out.

C) lower gross profit compared to last-in first-out.

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If prices are decreasing, FIFO assumes the higher-cost earliest purchases are the first items sold. This results in higher COGS, lower inventory, and lower gross profit compared to LIFO.

1215

If prices are increasing, the weighted average cost method most likely results in inventory values that are higher than the inventory values using:

A) first-in first-out (FIFO).

B) last-in first-out (LIFO).

C) specific identification.

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In a increasing price environment, inventory values reported under LIFO are lower than the values reported under FIFO, and the values that result from weighted average cost are between the LIFO and FIFO values. Thus, the value of inventory using weighted average cost is higher than inventory using LIFO. The value of inventory using specific identification depends on which particular items from inventory are sold, and thus can be higher or lower than the inventory values that result from the other methods.