Elly Company uses a periodic inventory system. Details for the inventory account for the month of January 2016 are as follows: $$\begin{array} { l c c r }
& \text { Units } & \text { Per unit price } & \text { Total } \
\hline\text { Balance, } 1 / 1 / 16 & 200 & \$ 5.00 & \$ 1,000 \
\text { Purchase, } 1 / 15 / 16 & 100 & 5.30 & 530 \
\text { Purchase, } 1 / 28 / 16 & 100 & 5.50 & 550
\end{array}$$ An end of the month (1/31/16) inventory showed that 150 units were on hand. If the company uses FIFO and sells the units for $9 each what is the gross profit for the month?

Question

Elly Company uses a periodic inventory system. Details for the inventory account for the month of January 2016 are as follows: $$\begin{array} { l c c r } 
& \text { Units } & \text { Per unit price } & \text { Total } \
\hline\text { Balance, } 1 / 1 / 16 & 200 & \$ 5.00 & \$ 1,000 \
\text { Purchase, } 1 / 15 / 16 & 100 & 5.30 & 530 \
\text { Purchase, } 1 / 28 / 16 & 100 & 5.50 & 550
\end{array}$$ An end of the month (1/31/16) inventory showed that 150 units were on hand. If the company uses FIFO and sells the units for $9 each what is the gross profit for the month?

Quizplus · Accepted Answer

To find the gross profit, we need to calculate the cost of goods sold (COGS) first. To do that using FIFO, we need to assume that the units sold came from the beginning inventory plus the first purchase (100 units) since these were the units available before the next purchase was made.

Cost of beginning inventory (50 units x $5) = $250
Cost of first purchase (100 units x $6) = $600
Total cost of goods available for sale = $850

150 units were sold, so the COGS will be calculated using the first 50 units from the beginning inventory plus 100 units from the first purchase.

COGS = (50 units x $5) + (100 units x $6) = $650
Revenue = 150 units x $9 = $1350
Gross profit = Revenue - COGS = $1350 - $650 = $700

Therefore, the correct answer is (B) $985.

Elly Company Uses a Periodic Inventory System An End of the Month (1/31/16) Inventory Showed That 150