Question

Blake Company purchased two identical inventory items. The item purchased first cost $24.00, and the item purchased second cost $25.00. Blake sold one of the items for $44.00. Which of the following statements is true?

• Ending inventory will be lower if Blake uses the weighted-average rather than the FIFO inventory cost flow method.

• Cost of goods sold will be higher if Blake uses the FIFO rather than the weighted-average inventory cost flow method.

• The dollar amount assigned to ending inventory will be the same no matter which inventory cost flow method is used.

• Gross margin will be higher if Blake uses LIFO rather than the FIFO inventory cost flow method.

Answer 1

Cost of goods available for sale = 1 * $24.00 + 1 * $25.00
Cost of goods available for sale = $49

Number of units available for sale = 2

Sales revenue = 1 * $44.00
Sales revenue = $44

FIFO:

Cost of goods sold = 1 * $24.00
Cost of goods sold = $24

Gross margin = Sales revenue - Cost of goods sold
Gross margin = $44 - $24
Gross margin = $20

Ending inventory = Cost of goods available for sale - Cost of goods sold
Ending inventory = $49 - $24
Ending inventory = $25

LIFO:

Cost of goods sold = 1 * $25.00
Cost of goods sold = $25

Gross margin = Sales revenue - Cost of goods sold
Gross margin = $44 - $25
Gross margin = $19

Ending inventory = Cost of goods available for sale - Cost of goods sold
Ending inventory = $49 - $25
Ending inventory = $24

Weighted Average:

Average cost per unit = Cost of goods available for sale / Number of units available for sale
Average cost per unit = $49 / 2
Average cost per unit = $24.50

Cost of goods sold = 1 * $24.50
Cost of goods sold = $24.50

Gross margin = Sales revenue - Cost of goods sold
Gross margin = $44 - $24.50
Gross margin = $19.50

Ending inventory = Cost of goods available for sale - Cost of goods sold
Ending inventory = $49 - $24.50
Ending inventory = $24.50

From the above calculations, correct option is “Ending inventory will be lower if Blake uses the weighted-average rather than the FIFO inventory cost flow method”