Question

Tetra Co. uses the perpetual inventory system and a FIFO cost flow method. On January 1, the company purchased 2,000 units of inventory that cost $4.00 each. On January 12, the company purchased an additional 3,000 units of inventory at a cost of $4.20 each. On January 20, Tetra Company sold 4,000 units of inventory. Assuming that Tetra Co. uses the perpetual inventory method and a FIFO cost flow method, how would the entry to recognize the cost of goods sold affect the financial statements?A. Increase inventory and increase cost of goods sold by $16,400B. Decrease cost of goods sold and increase inventory by $16,600C. Increase cost of goods sold and decrease inventory by $16,400D. Increase inventory and increase cost of goods sold by $16,600

Answer 1

C. Increase cost of goods sold and decrease inventory by $16,400

Step-by-step explanation:

FIFO method Sales the Older Inventory Acquired first followed by the Recent Acquired Inventory.

Cost of Sales Calculation

January 20 : 2000 units × $4.00 = $8,000

2000 units × $4.20 = $8,400

Total = $16,400

Journal

Cost of Sales $16,400 (debit)

Inventory $16,400 (credit)

Answer 2

C. Increase cost of goods sold and decrease inventory by $16,400

Step-by-step explanation:

When Inventory is purchased, Debit Inventory and credit Cash/Accounts payable. As Inventories are sold, debit (increase) cost of goods sold (with the cost of the items sold) and Credit (decrease) Inventory account.

Using the first in first out method, the 4,000 units sold must have consisted of the following purchases;

• 2000 units on January 1
• 2000 units from the 3000 on January 13

Hence the cost of goods sold

= 2000 * $4 + 2000 * $4.20

= $16,400