Similar to the example of FIFO and LIFO inventory accounting methods in the text, a college store purchased sweatshirts for the upcoming fall semester. Using the following data, where a total of 100 sweatshirts were purchased by the store and placed in inventory, select the correct statement from the following choices.

Question

Quizplus · Accepted Answer

Under FIFO (First In, First Out) accounting method, the first items purchased are the first items sold. Therefore, in this case, assuming all 100 sweatshirts are sold in the fall semester, the cost of goods sold would be calculated using the cost of the oldest sweatshirts in inventory. Since the store paid $15 for the first 50 sweatshirts, and $20 for the remaining 50 sweatshirts, the cost of goods sold using FIFO would be $1,500 ($15 x 50) + $1,000 ($20 x 50) = $2,500.

Under LIFO (Last In, First Out) accounting method, the newest items purchased are the first items sold. Therefore, assuming all 100 sweatshirts are sold in the fall semester, the cost of goods sold would be calculated using the cost of the most recent sweatshirts in inventory. Since the store paid $20 for the last 50 sweatshirts, and $15 for the first 50 sweatshirts, the cost of goods sold using LIFO would be $1,000 ($20 x 50) + $750 ($15 x 50) = $1,750.

Since the cost of goods sold using FIFO ($2,500) is higher than the cost of goods sold using LIFO ($1,750), the profit using FIFO would be lower. Therefore, the correct statement is that "B) FIFO would provide the most profit."

Similar to the Example of FIFO and LIFO Inventory Accounting