Final answer:
The cost flow assumption used by Jersey Company is FIFO (First-In, First-Out), as determined by the costs associated with the inventory sold and the gross profit earned.
Step-by-step explanation:
The subject of the question is determining the cost flow assumption used by Jersey Company in their inventory management based on the given transaction details. To solve this, we need to use the cost of goods sold (COGS) and the gross profit data provided to work backward and figure out which costing method was applied—whether it was FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or Weighted Average Cost. Here is how we could approach it: Jersey Company started with 500 units at $4 per unit, adding 300 units at a total cost of $2,800. They sold 400 units at a price of $10 each, resulting in total sales of $4,000. The gross profit from these sales was $1,600, which implies that the COGS was $2,400 ($4,000 - $1,600).
If we calculate using the LIFO method, the last units purchased would be the first ones to be sold. Here, the last 300 units cost a total of $2,800, which would not even cover the COGS of $2,400 for 400 units, indicating that LIFO is likely not the method used. Under the FIFO method, the first 400 units sold would have been from the initial 500 units at $4 each, totaling $1,600, which aligns with the COGS given when we account for the gross profit. Therefore, using FIFO seems to be the right assumption. Thus, the correct answer is (c) FIFO.