Question

Company A is a new online hat retailer. During the first month they made the following purchases of hats and had the following sales of hats:

January 1: Purchased 400 hats for $5 each.
January 15: Purchased 200 hats for $6 each.
January 31: Sold 250 hats.

What would be the Cost of Goods Sold if they use FIFO?

Answer 1

Using FIFO, Company A's Cost of Goods Sold for the 250 hats sold would be $1,250, calculated by selling the first 250 out of the initial 400 hats purchased at $5 each.

Step-by-step explanation:

The question pertains to calculating the Cost of Goods Sold (COGS) for Company A using the FIFO (First-In, First-Out) accounting method. Under FIFO, the oldest inventory—the first items brought into inventory—are the first ones to be sold. In the scenario given, Company A purchased 400 hats at $5 each on January 1, followed by a purchase of 200 hats at $6 each on January 15. When they sold 250 hats on January 31, they would sell the oldest items first.

To compute COGS using FIFO:

• The first 250 hats out of the 400 initially purchased would be accounted for at the $5 purchase price.

The calculation is 250 hats at $5 each, equaling $1,250 COGS.