Addison, inc. uses a perpetual inventory system. the following is information about one inventory item for the month of september: sep. 1 inventory 20 units at $20 4 sold 10 units 10 purchased 30 units at $25 17 sold 20 units 30 purchased 10 units at $30 if addison uses fifo, the cost of the ending merchandise inventory on september 30 is $800 $650 $750 $700

$800

Explanation:

The FIFO (First In First Out) inventory valuation system seeks to ensure that there is an approximate flow of the goods in store.

It ensures that the first goods bought are the ones sold and is mostly applicable or useful for perishable items, such that the first ones bought are the ones sold.

I will explain this question using an excels sheet.

            Purchases                 Sales              Balance

Date    Qty   Price   Amt   Qty Price AmtQtyAmt

Sep 1    20    20      400     0    0    0           20   400

Sep 4    0      0           0     10  20  200  10200

Sep 10  30   25750     0     0      0   40   950  

Sep 17   0      0    0    10    20   200      

       10    25   250        20    500

Sep 30

I am going to leave the last one for you to do yourself and see how I got the final answer of $800.

There is the column for purchases showing the goods bought, Sales showing goods sold and running balance when sales are made.

The most fundamental thing to keep in mind is that when sale is made, it must be removed from existing stock in inventory before moving to more recent goods bought.

This is evident on September 4th when there was a sale of 10 units.

Kindly note that the cost of goods sold will always be at the price of goods in inventory.

Whenever there is a purchase, the balance column will increase by the number of units and the cost of the goods. Whenever there is a sale, the balance column will reduce by the number of units and the cost of sale, which in this case is always the cost of purchase of units sold.

On Sept 17, you will notice that there was a sale of 20 units, but we had 10 units unsold from Sept 4th at $20 before we moved on to sell another 10 units from the most recent purchase at $25.

I believe with this explanation, there is no question under FIFO valuation method you will not be able to answer

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