Question

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

Answer 1

The FIFO method would result in a higher Cost of Goods Sold of $5 and a lower Gross Profit when compared to LIFO, assuming two units are sold from inventory acquired at varying costs of $3, $2, and $1 respectively.

Step-by-step explanation:

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2, and then later another at $1, and you sold 2 of the units, the inventory accounting method that would result in the higher Cost of Goods Sold (COGS) and lower Gross Profit would depend on whether you use the Last-In, First-Out (LIFO) or First-In, First-Out (FIFO) approach.

Under the LIFO method, the last items purchased are assumed to be sold first. So if you sold 2 units, you would sell the ones that cost $1 and $2, leading to a COGS of $3 ($1 + $2) and a higher gross profit when compared to the FIFO method.

However, using the FIFO method, the first items purchased are sold first. In this scenario, you would sell the units that cost $3 and $2, resulting in a COGS of $5 ($3 + $2), which is higher than that of the LIFO method and thus results in a lower gross profit.