The Calculation of Gross Profit Using the LIFO Inventory Valuation Method
What is the gross profit on a sale of inventory items purchased at different prices using the LIFO method?
Assuming a company has three identical inventory items purchased at different times that cost $500, $525, and $550 in that order. If one of the items is sold for $700, what is the gross profit on that sale?
Answer:
The gross profit on the sale of one inventory item purchased at different prices using the LIFO method is $150.
The gross profit, under the LIFO inventory valuation method, on a single $700 sale of inventory purchased at three different prices ($500, $525, and $550) would be $150.
The calculation of gross profit in this scenario involves using the Last In, First Out (LIFO) method to determine the cost of goods sold and the selling price. In this case, the last item purchased (which cost $550) would be the first one sold.
To calculate the gross profit, we subtract the cost of goods sold (which is $550) from the selling price ($700). Therefore, the gross profit is $700 - $550 = $150.
Understanding the different inventory valuation methods such as LIFO is essential for businesses to accurately determine their financial performance and profitability.