Question

Blake Company purchased two identical inventory items. The item purchased first cost $18.00, and the item purchased second cost $19.00. Blake sold one of the items for $32.00.Which of the following statements is true?a. Gross margin will be higher if Blake uses LIFO than it would be if FIFO were used.b. The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used.c. Ending inventory will be lower if Blake uses weighted average than if FIFO were used.d. Cost of goods sold will be higher if Blake uses FIFO than if weighted average were used.

Answer 1

Answer:

c. Ending inventory will be lower if Blake uses weighted average than if FIFO were used

Explanation:

To check which answer is correct, we simply evaluate each option step by step.

Option A

Gross margin is the difference between selling price and cost.

Under FIFO gross margin is $14. (32 -18 =14)

Under LIFO gross margin is $13. (32-19 = 13)

Thus statement is incorrect as gross margin is higher if FIFO is used.

Option B

If FIFO is used, the dollar amount of ending inventory will be $19 as ending inventory will contain product purchased later that is at $19. In contrast, if LIFO is used, the dollar amount of ending inventory will be $18. Thus the statement becomes incorrect that it will be the same.

Option C

The ending inventory under FIFO is $19.

The ending inventory under LIFO is $18

The endng inventory under AVCO or weighted average will be, 18+19 / 2 = 18.5

Thus the statement is correct as the ending inventory under weighted average $18.5 is lower than ending inventory under FIFO $19. So, C is the correct Answer.