Question

Hoover Company purchased two identical inventory items. The item purchased first cost $41.00. The item purchased second cost $45.50. Then Hoover sold one of the inventory items for $60. Based on this information:A) the amount of ending inventory is $45.50 if Hoover uses the LIFO cost flow method.B) the amount of gross margin is $16.75 if Hoover uses the weighted average cost flow method.C) the amount of cost of goods sold is $45.50 if Hoover uses the FIFO cost flow method.D) the amount of cost of goods sold is $41.00 if Hoover uses the LIFO cost flow method.

Answer 1

Answer:

C is the answer.

Explanation:

If Hoover uses the weighted average cost flow method, the two items are added up and weighed or divided by two as in this case.  This gives a total cost of $86.50 ($41 + $45.50) and an average cost of $43.25 ($86.50/2).  Since the item was sold for $60, there is a gross margin of $16.75 ($60 - $43.25).

Answer A is wrong because if Hoover uses the LIFO method, the ending inventory would have been valued at $41 and not $45.50, which represents the value of item sold.

Answer C is wrong because if Hoover uses the FIFO method, the cost of goods sold is $41 and not $45.50.

Similarly, answer D is wrong because if Hoover uses the LIFO method, the cost of goods sold is $45.50 and not $41.

Note: LIFO means Last In, First Out while FIFO means First In, First Out.    They are cost flow methods of valuing goods sold and inventory, together with the weighted average method.

Answer 2

Answer:

B) the amount of gross margin is $16.75 if Hoover uses the weighted average cost flow method.

Explanation:

Weighted Average cost flow method= $ 41+ $ 45.5/2= 86.5/2=$ 43.25

Sales Price =                              $ 60

Less Unit Sold at                       $ 43.25

Gross Margin                              $ 16.75

Only option B is correct

Option A is incorrect because LIFO would assign $ 41 to ending inventory.

Option C is incorrect  because FIFO would assign $ 41 to cost of goods sold

Option D is incorrect because LIFO would assign $ 44.4 to cost of goods sold.