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Under the LIFO perpetual method, when an item is resold, which costs make up the cost of merchandise sold and which costs remain in Merchandise Inventory?
AMost recent costs in cost of sales; earliest costs in ending inventory
BEarliest costs in cost of sales; most recent costs in ending inventory
CAverage costs in cost of sales; average costs in ending inventory
DLowest costs in cost of sales; highest costs in ending inventory
Answer & Solution
Correct answer: A. Most recent costs in cost of sales; earliest costs in ending inventory
1. LIFO means last-in, first-out, so the most recently purchased costs flow out first.
2. Those most recent costs become cost of merchandise sold.
3. The earliest purchased costs stay behind as ending inventory.
4. Rule out option B, which describes FIFO, the opposite assumption.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.1.1 "Perpetual Inventory System", p.117_
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