A company commences business on 1 April. It buys the following units of inventory. Date
1 April
1 September
1 December

Quantity
200
400
200

Unit cost
£250
£200
£300

During the year, it sells 500 units at £550 each.
What is the gross profit for the year using the first in first out (FIFO) method of inventory
valuation?

B £155,000
C £156,250
A £85,000
D £165,000

D £165,000

Explanation:

The computation of gross profit for the year using the first in first out (FIFO) method of inventory  valuation is shown below:-

As we know that

Gross profit = Sales - the cost of goods sold

where

Sales is

= 500 units × £550

= £275,000

And, the cost of goods sold is

= 200 units × £250 + 300 units × £200

= £50,000 + £60,000

= £110,000

We considered only 500 units as these sold units are sold

And, this is a first in first out method so we pick the first date units only

So, the gross profit is

= £275,000 - £110,000

= £165,000

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