Question

Bensen Company purchased two identical inventory items. The item purchased first cost $40. The second item cost $42. If one of the items were sold, which cost flow method would produce the highest amount of cost of goods sold?

Answer 1

The cost flow method that would produce the highest amount of cost of goods sold depends on the method chosen by the company. There are three commonly used cost flow methods: FIFO, LIFO, and average cost method.

Step-by-step explanation:

The cost flow method that would produce the highest amount of cost of goods sold depends on the method chosen by the company. There are three commonly used cost flow methods: FIFO, LIFO, and average cost method.

Under FIFO (First-In-First-Out) method, the cost of goods sold is calculated based on the assumption that the first items purchased are the first ones sold. Therefore, if one of the items were sold, the cost of goods sold would be $40 because it would be based on the cost of the first item purchased.

Under LIFO (Last-In-First-Out) method, the cost of goods sold is calculated based on the assumption that the last items purchased are the first ones sold. Therefore, if one of the items were sold, the cost of goods sold would be $42 because it would be based on the cost of the second item purchased.