Question

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

A. all sales were from current production.

B. all sales were from beginning inventory.

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

D. all sales were for cash.

Answer 1

In FIFO inventory accounting, sales are assumed to come from the beginning inventory until it is depleted, and then from current production. A firm with sales revenue of $1 million and expenses totaling $950,000 in labor, capital, and materials has an accounting profit of $50,000.

Step-by-step explanation:

In calculating gross profits using FIFO (First-In, First-Out) inventory accounting, a firm would assume that sales were from beginning inventory until it was depleted, and then would use sales from current production. This accounting method matches sales with the costs of the earliest goods purchased or produced. Now, considering the firm scenario presented, the firm's accounting profit is calculated by subtracting the explicit costs from the total revenues. This is shown by taking the sales revenue of $1 million and subtracting the explicit costs of labor ($600,000), capital ($150,000), and materials ($200,000), resulting in an accounting profit of $50,000.