A company just starting business made the following four inventory purchases in June: $$\begin{array} { r r r r }
\text { June } & 1 & 150 \text { units } & \$ 390 \
\text { June } & 10 & 200 \text { units } & 598 \
\text { June } & 15 & 200 \text { units } & 630 \
\text { June }& 28 & 150 \text { units } & \underline { 510 } \
& & & \underline { \$ 2,128 }
\end{array}$$ A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. The inventory method which results in the highest gross profit for June is

Question

A company just starting business made the following four inventory purchases in June: $$\begin{array} { r r r r } 
\text { June } & 1 & 150 \text { units } & \$ 390 \
\text { June } & 10 & 200 \text { units } & 598 \
\text { June } & 15 & 200 \text { units } & 630 \
\text { June }& 28 & 150 \text { units } & \underline { 510 } \
& & & \underline { \$ 2,128 }
\end{array}$$ A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. The inventory method which results in the highest gross profit for June is

Quizplus · Accepted Answer

With the FIFO (First-In, First-Out) method, the oldest inventory is sold first, and the cost of goods sold (COGS) is based on the cost of the oldest purchases. Since the company just started in June, the inventory purchases with the lowest costs are the oldest and will be used to calculate COGS, resulting in a higher gross profit. The LIFO (Last-In, First-Out) method would result in higher COGS and lower gross profit because the most recent, higher-priced inventory purchases would be used to calculate COGS. The weighted average unit cost method would result in COGS and gross profit calculations based on the average cost of all inventory purchases for the month, which may not necessarily result in the highest gross profit. Therefore, Answer A) the FIFO method is the best choice for this scenario.

A Company Just Starting Business Made the Following Four Inventory