Question of the Week

A company starts the year with five widgets in its inventory. In order of purchase, two units were bought at $700 each, one unit was bought for $600, and the remaining two units were bought for $750 a piece. Throughout the year, the firm first purchased three units at $800 each and another four units at $825 each. By year end, the firm had sold eight units at $1,000 a piece. The actual units sold included all those from the beginning inventory and the initial three units bought during the year. Which of the following results would be true through the use of the FIFO method?

A) Ending inventory equals $2,750.
B) Profit equals $3,050.
C) Cost of goods sold equals $5,900.
D) Profit equals $1,550.

Answer:

The correct answer is: C)

Sales (8 units @ $1,000)   $8,000
         
Cost of Goods Sold (COGS):    
  1. Beginning Inventory:    
    2 @ 700 = 1,400    
    1 @ 600 = 600    
    2 @ 750 = 1,500 $3,500  
         
  2. Purchases:    
    3 @ 800 = 2,400    
    4 @ 825 = 3,300 $5,700  
      $9,200  
  Less:    
  3. Ending Inventory (4 units)    
    4 @ 825 = $3,300  
         
COGS   $5,900
PROFIT   $2,100