Assume that the client's valuation of an inventory item is $10 per unit for 1,000 units, using first-in, first-out (FIFO). If the most recent acquisition of inventory was for 600 units at $10 per unit and the immediately preceding acquisition was for 700 units at $9 per unit, the inventory item is in error and it is
A) understated $400.
B) understated $300.
C) overstated $400.
D) overstated $700.

Question

Quizplus · Accepted Answer

The error is that the inventory item is being valued at the most recent acquisition cost of $10 per unit, instead of using the FIFO method. Using FIFO, the cost of the 600 units would be based on the preceding acquisition cost of $9 per unit, resulting in a lower valuation of $5,400 (600 units x $9 per unit) instead of $6,000 (600 units x $10 per unit). Therefore, the inventory item is overstated by $600 ($6,000 - $5,400) or $400 (if rounded down to the nearest hundred).

Assume That the Client's Valuation of an Inventory Item Is