Question

In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that

A. all sales were from current production.

B. all sales were from beginning inventory.

C. sales were from current production until current production was depleted, and then would use sales from beginning inventory.

D. all sales were for cash.

Answer 1

The firm's accounting profit is calculated by subtracting total explicit costs from sales revenue, resulting in an accounting profit of $50,000 for the last year.

Step-by-step explanation:

To calculate the accounting profit of a firm, you deduct all explicit costs from the total revenues. In the case provided, the firm had a sales revenue of $1 million. The costs are comprised of $600,000 for labor, $150,000 for capital, and $200,000 for materials. These costs are explicit because they represent direct payments for production inputs.

To find the accounting profit, we calculate:

1. Sales Revenue = $1,000,000
2. Total Explicit Costs = Labor ($600,000) + Capital ($150,000) + Materials ($200,000) = $950,000
3. Accounting Profit = Sales Revenue - Total Explicit Costs = $1,000,000 - $950,000 = $50,000

Therefore, the firm's accounting profit for last year was $50,000.