A firm has the following inventory information for the first quarter:
01/01 Beginning Inventory 50 units @ $5
01/15 Purchases 80 units @ $5.50
02/15 Purchases 60 units @ $5.25
02/15 Purchases 40 units @ $5.75
Sales 170 units @ $10
Total operating expenses $500
What is ending inventory under FIFO?
A. $305
B. $322.17
C. $335
D. $350
I have selected a. Is this correct? Thank you!
To calculate the ending inventory under the FIFO (First-In, First-Out) method, we need to understand the concept of inventory flow. The FIFO method assumes that the first items purchased are the first ones sold, which means the most recently purchased units remain in the ending inventory.
Let's break down the inventory transactions and compute the ending inventory step by step:
1. Beginning Inventory (01/01): 50 units @ $5 = $250
2. First Purchase (01/15): 80 units @ $5.50 = $440
3. Second Purchase (02/15): 60 units @ $5.25 = $315
4. Third Purchase (02/15): 40 units @ $5.75 = $230
Now, let's calculate the cost of goods sold (COGS) using the FIFO method:
First, we assume the units sold are from the earliest purchases. In this case, we have two purchases before the sales occurred:
1. Sale of 50 units from the Beginning Inventory (01/01): 50 units x $5 = $250
Remaining units in Beginning Inventory: 0 units
2. Sale of 80 units from the First Purchase (01/15): 80 units x $5.50 = $440
Remaining units in First Purchase: 0 units
Next, we need to calculate the remaining sales from the Second Purchase (02/15). Since we have 60 units from this purchase, but only sold 70 units, we take the remaining 70 units and allocate them to the Third Purchase (02/15).
3. Sale of 40 units from the Third Purchase (02/15): 40 units x $5.75 = $230
Remaining units in Third Purchase: 30 units
Now, let's calculate the ending inventory:
1. 30 units from the Third Purchase (02/15) @ $5.75 = $172.50
Finally, to compute the ending inventory, we add up the remaining values:
Ending Inventory = Remaining units x Unit cost
Ending Inventory = 30 units x $5.75 = $172.50
Therefore, the correct option is C. $335.
Please note that this calculation assumes a periodic inventory system, where the cost of goods sold is determined at the end of the period based on the quantities and costs available during that period.