The inventory transactions of Green Products Incorporated are shown below. Date Transaction Number of Units Unit CostJanuary 1 Beginning inventory 500 $5May 15 Purchase 1,000 6June 10 Purchase 500 7October 25 Purchase 2,000 8Units sold during the year: 3,000What is the amount of cost of goods sold that Green Products will report in its income statement for the current year, if it uses the first-in, first-out cost method?
Question
The inventory transactions of Green Products Incorporated are shown below. Date Transaction Number of Units Unit CostJanuary 1 Beginning inventory 500 $5May 15 Purchase 1,000 6June 10 Purchase 500 7October 25 Purchase 2,000 8Units sold during the year: 3,000What is the amount of cost of goods sold that Green Products will report in its income statement for the current year, if it uses the first-in, first-out cost method?
Solution
To calculate the cost of goods sold (COGS) using the First-In, First-Out (FIFO) method, we need to start by selling the oldest inventory first.
Here's how to calculate it:
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From the 3,000 units sold, start by subtracting the 500 units from the beginning inventory (January 1). The cost for these is 500 units * 2,500.
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You still need to account for 2,500 units sold (3,000 - 500). Next, subtract the 1,000 units purchased on May 15. The cost for these is 1,000 units * 6,000.
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You still need to account for 1,500 units sold (2,500 - 1,000). Next, subtract the 500 units purchased on June 10. The cost for these is 500 units * 3,500.
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You still need to account for 1,000 units sold (1,500 - 500). Finally, subtract 1,000 units from the 2,000 units purchased on October 25. The cost for these is 1,000 units * 8,000.
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Add up all these costs: 6,000 + 8,000 = $20,000.
So, the cost of goods sold that Green Products will report in its income statement for the current year, if it uses the first-in, first-out cost method, is $20,000.
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