Question

Assume that we use a perpetual inventory system and that five identical units are purchased separately at the following four dates and costs: April 5 at $10, April 10 at $12, April 15 at $14, and April 20 at $16 April 20 $17. One unit is then sold on April 25. The company uses the first-in, first-out (FIFO) inventory costing method. Identify whether each of the items purchased will be sent to cost of goods sold on the income statement or reported in inventory on the balance sheet using the drop-down list.

Answer 1

Using FIFO, the unit bought first on April 5 at $10 goes to cost of goods sold, while remaining units at $12, $14, $16, and $17 stay in inventory.

Step-by-step explanation:

Applying FIFO Method in Perpetual Inventory System

When using the first-in, first-out (FIFO) inventory costing method in a perpetual inventory system, the earliest purchased items are the first to be sent to cost of goods sold on the income statement upon sale. Assuming five identical units are purchased on different dates and at varying costs, we can outline which items are sold and which remain in inventory when one unit is sold on April 25. The purchases are as follows:

• April 5 at $10
• April 10 at $12
• April 15 at $14
• April 20 at $16
• April 20 at $17 (Note: This appears to be an error in the original question as there are two purchases on April 20 with different costs; only one can be correct)

Since one unit is sold on April 25, under FIFO, the unit that was bought first will be sold first. Therefore, the $10 unit from April 5 will be recorded in cost of goods sold. The remaining units, purchased on April 10, 15, and 20 (at either $16 or $17, depending on the correction of the typo), will be reported in inventory on the balance sheet.