Question

Suppose that David had the following transactions for his business inventory of widgets (purchase prices below).

  Widget      Purchase Date     Direct Cost    Other Costs    Total Cost
#1              August 15             $ 2,100            $ 100             $ 2,200
#2              October 30            $ 2,200            $ 150             $ 2,350

#3           November 10          $ 2,300            $ 100             $ 2,500

a) In late December, David sold widget #2. What cost of goods sold would David record if he elects to use the LIFO method this year?

b) In late December, David sold widget #2. What ending inventory would David record if he elects to use the FIFO method this year?

Answer 1

a) Under LIFO, goods purchased last are sold first. In the given case, the cost of goods sold will be equal to total cost of widgets purchased on Nov. 10 (i.e. in the last)

Cost of goods sold = $2,500

Therefore David would record $2,500 for cost of goods sold if he elects to use the LIFO method this year.

b) Under FIFO method, goods purchased first are sold first. In the given case, the ending inventory will be equal to total cost of goods purchased on Oct. 30 and Nov. 10.

Ending Inventory = $2,350+$2,500 = $4,850

Therefore David would record $4,850 for ending inventory if he elects to use the FIFO method this year.