On June 1, Delaware Co. had one unit in beginning inventory that cost $10.00. During June, Delaware paid cash to purchase two additional inventory items. Delaware purchased the first item for cash at a cost of $10.00, and the second at a cost of $12.00. Delaware Co. sold two inventory items for $24.00 each, receiving cash.

Question

Based on this information alone, indicate whether each of the following items is true or false.

a) The amount of ending inventory will be $10 assuming the LIFO cost flow method was used.
b) Cost of goods sold would be $24 assuming the weighted-average cost flow method was used.
c) Cash flow from operating activities in June would be $28 assuming a FIFO cost flow method was used.
d) Cash flow from operating activities in June would be $26independent of what cost flow method was used.
e) The amount of gross margin would be $26 assuming the FIFO cost flow method was used.

Answer 1

a) T b) F c) F d) T e) F
a) This is true. LIFO will report the cost of the oldest unit of inventory (beginning inventory) as its ending inventory.
b) This is false. Average cost per unit = ($10 + $10 + $12) ÷ 3 = $10.67 per unit; Cost of goods sold = 2 units × $10.67 = $21.34
c) This is false. Cash flow from operating activities = $24 inflow + $24 inflow ? $10 outflow ? $12 outflow = $26 inflow
d) This is true. Cash flow from operating activities = $24 inflow + $24 inflow ? $10 outflow ? $12 outflow = $26 inflow. This is unaffected by the inventory cost flow method used.
e) This is false. Sales of $48 ? Cost of goods sold of ($10 + $10) = $28 gross margin