Question

Assume that three identical units of merchandise are purchased during October, as follows:

			Units	Cost
October	5	Purchase	1	$ 5
	12	Purchase	1	7
	28	Purchase	1	9
Total			3	$21

Assume one unit is sold on October 31 for $15. Determine Cost of Merchandise Sold, Gross profit, and Ending Inventory under the FIFO method.

Answer 1

Under the First in first out (FIFO) method of inventory valuation, Cost of goods sold consists of the units from beginning inventory and earliest purchases. Ending inventory consists of the units from recent purchases.

One unit sold on October 31 belongs to October 5 purchases.

Cost of goods sold = 1 * $5 = $5

Sales = 1 * $15 = $15

Ending inventory of 3 units consisists of 1 unit from October 12 purchases and 1 unit from October 28 purchases.

Cost of Merchandise sold = $5

Gross profit = Sales - Cost of goods sold

= $15 - $5

= $10

Ending inventory = (1*$7) + (1*$9)

= $7 + $9

= $16