CSLB Law & Business ExamBusiness FinancesHard
A contractor uses the FIFO (first-in, first-out) method to value inventory. The contractor purchased 100 units of a fitting at $6 each, then later purchased another 100 units at $8 each. During the month, the contractor used 150 units on jobs. Under FIFO, what is the value of the remaining 50 units in ending inventory?
- A$600
- B$400
- C$800
- D$300
Show answer & explanationAnswer & explanation
Correct answer: B. $400
Under FIFO, the earliest units purchased are assumed used first. The first 100 units used come from the $6 batch, and the next 50 units used come from the $8 batch (100 + 50 = 150 used). This leaves 50 units remaining from the $8 batch: 50 × $8 = $400.
Why the other options are wrong
- A. Overstates the value by using an incorrect unit count or price.
- C. Uses the wrong quantity for the ending inventory calculation.
- D. Assumes all remaining units are valued at the older $6 price, which is incorrect under FIFO.
FIFO Inventory Method
An inventory valuation method assuming the oldest (first purchased) units are used or sold first, leaving the newest purchases in ending inventory.
- First-In, First-Out: oldest costs are expensed first
- Ending inventory reflects most recent purchase costs
- Commonly used to match rising cost trends with financial reporting
Memory trick: First in the door, first out the door — the newest stock stays on the shelf.