A trader's inventory records show: 10 units bought at KSh 100, then 10 units bought at KSh 120. 12 units are sold. Using FIFO, what is the cost of the 8 units left in inventory?
Answer and explanation
Correct answer: B. KSh 960
- Step 1: Under FIFO the oldest units are sold first: 10 at KSh 100, then 2 at KSh 120. Step 2. The 8 units left are all from the second purchase: 8 x 120 = KSh 960. Answer: KSh 960. Why not the others: KSh 880: That values the units at the simple average price of KSh 110. KSh 800: That is the LIFO answer, valuing the 8 units at the older price of KSh 100. KSh 1,000: That values the 8 units at KSh 125 each, a price that was never paid.
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