Question

Inventory item 101 purchased in October cost $100. Inventory item 102 purchased in November cost $110. The two inventory items are identical in all respects, except the price paid to acquire them. The business uses the Last-in, first-out (LIFO) cost flow method. If item 101 is sold to a customer, the amount assigned to cost of goods sold is ______.

Multiple choice .
a. $105
b. $100
c. $110
d. $0

Answer 1

Using LIFO, the cost of item 102 at $110 is assigned to the cost of goods sold when item 101 is sold, affecting the business's accounting profit.

Step-by-step explanation:

Under the Last-in, first-out (LIFO) inventory costing method, the most recent costs are assigned to the cost of goods sold (COGS). Since item 102 was acquired last at a cost of $110, it will be the first to go out when a sale is made.

Therefore, if inventory item 101 is sold, applying LIFO means that item 102, which costs $110, is what should be accounted for in the COGS, not the purchase cost of item 101. It is important to consider that the value assigned to COGS affects the calculation of gross profit and the accounting profit of the business for the period.