A company just starting business made the following four inventory purchases in June: A physical count of merchandise inventory on June 30 reveals that there are 100 units on hand. The inventory method which results in the highest gross profit for June is
A) the FIFO method.
B) the specific identification method.
C) the average-cost method.
D) not determinable.

Question

A company just starting business made the following four inventory purchases in June:  A physical count of merchandise inventory on June 30 reveals that there are 100 units on hand. The inventory method which results in the highest gross profit for June is
A) the FIFO method. 
B) the specific identification method. 
C) the average-cost method. 
D) not determinable.

Quizplus · Accepted Answer

Under the FIFO method, the first units purchased are assumed to be sold first. Therefore, since the inventory on hand consists of the most recently purchased units, the cost of goods sold will reflect the lower costs of the units purchased in June, resulting in a higher gross profit. This is in contrast to the average-cost method or specific identification method, where the cost of goods sold would be a weighted average of all units purchased or the actual cost of the specific units sold, respectively. The information given does not provide enough detail to determine the specific identification of units sold, making option B not determinable.

A Company Just Starting Business Made the Following Four Inventory