Chapter 13: Inventories Questions and solutions which have a GST version: • Exercise 13.1 • Exercise 13.4 • Exercise 13.5 • Exercise 13.6 • Exercise 13.7 • Exercise 13.8 • Exercise 13.9 • Exercise 13.12 • Exercise 13.13 • Problem 13.16 • Problem 13.17 • Problem 13.18 • Problem 13.19 • Problem 13.20 • Problem 13.21 • Problem 13.22 • Problem 13.23 • Problem 13.24 • Problem 13.25 • Problem 13.26 • Problem 13.27 • Problem 13.28 • Problem 13.29 • Problem 13.30 • Case study | Decision analysis | Inventory and computer retailing Discussion questions 1. What costs should be included in the cost of an item of inventory? According to IAS 2/AASB 102, ‘cost’ in relation to inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. The cost of inventory therefore represents the sum of all direct and indirect costs incurred to bring the merchandise to a saleable condition and to its existing location. Cost includes the purchase price, import duties and taxes (other than those subsequently recoverable from tax authorities, such as GST), transport, handling charges such as insurance on the goods while in transit, and other costs directly incurred in acquiring the goods and bringing them to their present location and condition. Any trade discounts or rebates, or settlement discounts received, must be deducted to arrive at cost. For a manufacturer, the cost of inventories under IAS 2/AASB 102 also includes the cost of conversion, which comprises all costs directly related to the units of production. Hence, the costs of direct labour, plus a systematic allocation of the entity’s fixed and variable factory overhead costs incurred in converting raw materials into finished goods, are included in the cost of conversion. However, the following costs are excluded from the cost of inventories: • the abnormal cost of wasted materials, labour and overhead • storage costs, unless those costs are necessary before a further production stage • administrative overhead costs that do not contribute to bringing the inventories to their present location and condition • selling and distribution costs. 2. ‘With sophisticated computer equipment available these days, the controversy over cost flow assumptions is no longer an issue.’ Discuss. What, if anything, do you know about the cost flow assumptions used in various popular computerised accounting packages on the market? Can the cost flow assumption be changed easily within the package, or does purchase of the package automatically dictate acceptance of the cost flow assumption preselected by writers of the package? The controversy over the cost flow assumption used will remain irrespective of the package selected, as selection of a cost flow assumption is a by-product of adopting the historical cost accounting system, not of the sophistication or otherwise of computer technology. 3. Must a company use the inventory costing method that best conforms to the actual physical movement of the goods? Explain. There is no need for the cost flow assumption used in inventory costing to reflect the actual physical movement of the goods. The FIFO assumption, which assumes first costs in are the first costs out, would also reflect the physical flow of goods in many organisations, especially if the organisation is dealing with perishable goods. But the standard does not require FIFO to be applied even if the physical flow reflects that the oldest goods are sold first. Furthermore, if goods sold in an entity are homogeneous in nature and age is not really an issue e.g. petrol and oil, perhaps the average cost flow assumption better reflects the actual flow of merchandise; but an entity is not required to use an average cost flow assumption. Indeed, if the actual physical flow of goods in an entity reflects that the last goods in are the first goods out, the entity is not allowed by the standard to use a LIFO assumption. 4. Critically examine the following statement: ‘During times of high inflation, the LIFO cost assumption should be permitted in financial statements because it allows the entity to show a more up-to-date profit figure.’ During times of inflation, the use of a LIFO cost assumption tends to cause cost of sales to reflect the most recent (higher) purchase prices. Hence, the cost of sales calculation will be a close approximation of the current cost of goods at the time of the sale, thereby producing a more up-to-date gross profit figure when deducted from current sales for the period. This applies only if inventories are not run down but are maintained at a reasonably constant level or gradually increased during the year. However, if inventories are run down at any stage during the period, very old, out-of-date cost prices will then be placed automatically into the cost of sales figure under LIFO, and the statement does not hold true. 5. Cottesloe Ltd has been using the FIFO costing method to account for inventories for several years. The company also has a policy of paying out all of its profits in cash dividends. What are the likely effects, adverse or otherwise, of continuing these policies? In a period of inflation, use of FIFO results in higher profits than under moving/weighted average or LIFO. If all profits are paid out in dividends, then dividends paid by Cottesloe Ltd will automatically be higher under FIFO during inflation. This will lead to an eventual shortage of cash when the company replaces its inventory at prices above previous price levels. The company will be forced eventually to borrow money, or to issue more share capital, in order to continue its operations at the same physical level as in the past. 6. Estimating the value of inventory is not sufficiently accurate to justify using such an approach. Only a full physical stocktake can give full accuracy.’ Discuss. Assuming that an entity uses a perpetual inventory system, use of a full physical stocktake is necessary to determine whether any merchandise has been lost, stolen or destroyed. The stocktake can verify the accuracy of the perpetual inventory records, thus assessing whether the cost of inventory as recorded by the perpetual system is a faithful representation of level of inventory on hand. However, those conducting the stocktake must be aware of the potential pitfalls involved, e.g. including merchandise which has been sold or is on consignment in the physical count, omitting merchandise which has been purchased but is not present in the warehouse at the end of the reporting period. Furthermore, if a company is using systems such as the retail inventory method, a full physical stocktake is necessary on a regular basis in order to verify the accuracy of the system. Methods such as the gross profit method are intended only to provide a rough approximation of inventory levels, and should always be verified by inventory count, if possible. In cases where inventory is inaccessible or is destroyed by natural disaster, use of the gross profit method may be the only way of estimating inventory losses for insurance purposes. 7. ‘Now that we have adopted the perpetual inventory system, we no longer need to conduct a costly and time-consuming stocktake’. Discuss. Even if an entity is using a perpetual inventory system, a full physical stocktake is necessary to determine whether any merchandise has been lost, stolen or destroyed; and can verify the accuracy of the perpetual inventory records. It is important in general purpose financial statements that the cost of inventory as recorded by the perpetual system is a faithful representation of level of inventory on hand. However, when conducting the stocktake, be aware of the potential pitfalls involved, e.g. including merchandise which has been sold or is on consignment in the physical count, omitting merchandise which has been purchased but is not present in the warehouse at the end of the reporting period. 8. Why is the lower of cost and net realisable value rule required by accounting standards? Is it permissible to revalue inventories upwards? If so, when? Are there any limits to revaluation? The lower of cost and net realisable value rule is used in order to ensure that inventory is not overvalued. Based on the qualitative characteristic of faithful representation, it is considered suitable that if inventory cost is below net realisable value, the most faithfully representative valuation is cost, and if net realisable value is less than cost, the most faithfully representative valuation is net realisable value. Inventory cannot be valued at more than the entity would obtain from its sale. It is not permissible to revalue inventory upwards, above cost. For inventory valued at net realisable value, if this value rises and the circumstances for the original write-down no longer exist, the standard permits a reversal of the write-down, but only if the reversal does not exceed the original cost. Cost is the maximum value permitted to be placed on inventories. See IAS 2/AASB 102, as discussed in learning objective 5 of this chapter of the text. 9. If the ending inventory is understated because of an error, what is the effect on profit in that reporting year and in the next reporting year? What is the effect on the value of assets as reported in the balance sheet at the end of each year? If ending inventory is understated, cost of sales in that reporting year will be overstated and hence, profits will be understated. This is so because cost of sales is calculated basically by the formula: Cost of sales = Beginning inventory + Net cost of purchases – Ending inventory In the balance sheet/statement of financial position, if inventory is understated at the end of the year, then obviously total assets are also understated. In the next year, assuming no additional errors, and assuming that the inventory is fully sold, there will be no error in the inventory balance at the end of that year. 10. Why must decision makers consider various inventory costing methods when interpreting ratios used in retail operations? See the discussion in learning objective 10 of this chapter. From the example there in the text, an entity can influence significantly the ratios calculated as indicators of its performance merely by changing its costing methods for inventory. It is important that decision makers are aware of the costing methods used by the entity; thus, the costing methods applied should be disclosed to external users of information about the entity under IAS 2/AASB 102, as discussed above. Note that LIFO, which produced the lowest profit ratios and the highest turnover, is banned from use under the standard. Note that, in times of rising prices, the FIFO method produces the highest gross profit ratio and profit margin, and the lowest inventory turnover, and the LIFO method produces the lowest gross profit ratio and profit margin, and the highest inventory turnover. The moving average method lies between these two extremes. As for the specific identification method, the three ratios can be manipulated merely by careful selection of the specific item to be sold. The example used in the text also shows the specific identification method to give results between the FIFO system and the LIFO system. It is important for a decision maker, therefore, to interpret the entity’s performance in light of the costing method being used Exercises Exercise 13.1 Determining ending inventory Non-GST version Sapphire Ltd’s ending inventory was assigned a cost of $55 200 by way of a physical inventory count on 31 December 2019. An audit of the company’s records revealed the following information. Ignore GST. 1. Sapphire Ltd had recorded a $4500 invoice from a supplier for goods shipped EXW on 26 December 2019. The goods were not included in the physical inventory count because they had not yet arrived. 2. Sapphire Ltd had recorded a $2000 tax invoice from a supplier for goods shipped DDP on 28 December 2019. The goods were not included in the physical inventory count because they had not yet arrived. 3. Sapphire Ltd had goods valued at $6400 out on consignment on 31 December 2019 that were not included in the physical inventory count. 4. Sapphire Ltd also acts as a consignee. Consigned goods on hand on 31 December 2019 totalled $6100, and were included in the physical inventory count. 5. Sapphire Ltd purchased goods worth $5500, which were received on 30 December 2019 and included in the physical inventory count. The invoice from the supplier was not recorded until January. 6. Sapphire Ltd sold goods costing $800 for $1200 on 27 December 2019, DDP. The buyer received the goods on 5 January 2020. The sale was on credit and was recorded in 2019, and the goods were excluded from the physical inventory count. Required (a) For each point, determine the effects on Sapphire Ltd’s 31 December 2019 account balances. (b) What is the correct ending inventory? (LO1) (a) Account Purchases Sales Inventory stocktake Inventory (Balance) $55 200 Dr 1. Purchases No change — +$4 500 $59 700 Dr 2. Purchases –$2 000 — No Change $59 700 Dr 3. Inventory +$6 400 $66 100 Dr 4. Inventory — — –$6 100 $60 000 Dr 5. Purchases +$5 500 — No Change $60 000 Dr 6. Sales — –$1 200 +$800 $60 800 Dr Effect on account balances: Purchases increased $3 500 Sales decreased $1 200 Inventory increased $5 600 (c) The correct ending inventory is $60 800. Exercise 13.1 Determining ending inventory GST version Sapphire Ltd’s ending inventory was assigned a cost of $55 200 by way of a physical inventory count on 31 December 2019. An audit of the company’s records revealed the following information. (a) Sapphire Ltd had recorded a $4950 (GST inclusive) invoice from a supplier for goods shipped EXW on 26 December 2019. The goods were not included in the physical inventory count because they had not yet arrived. (b) Sapphire Ltd had recorded a $2200 (GST inclusive) tax invoice from a supplier for goods shipped DDP on 28 December 2019. The goods were not included in the physical inventory count because they had not yet arrived. (c) Sapphire Ltd had goods valued at $6400 out on consignment on 31 December 2019 that were not included in the physical inventory count. (d) Sapphire Ltd also acts as a consignee. Consigned goods on hand on 31 December 2019 totalled $6100, and were included in the physical inventory count. (e) Sapphire Ltd purchased goods worth $6050 (GST inclusive), which were received on 30 December 2019 and included in the physical inventory count. The invoice from the supplier was not recorded until January. (f) Sapphire Ltd sold goods costing $800 for $1320 (GST inclusive) on 27 December 2019, DDP. The buyer received the goods on 5 January 2020. The sale was on credit and was recorded in 2019, and the goods were excluded from the physical inventory count. Required (a) For each point, determine the effects on Sapphire Ltd’s 31 December 2019 account balances. (b) What is the correct ending inventory? (LO1) (a) Account Purchases Sales Inventory stocktake Inventory (Balance) $55 200 Dr 1. Purchases No change — +$4 500 $59 700 Dr 2. Purchases –$2 000 — No Change $59 700 Dr 3. Inventory +$6 400 $66 100 Dr 4. Inventory — — –$6 100 $60 000 Dr 5. Purchases +$5 500 — No Change $60 000 Dr 6. Sales — –$1 200 +$800 $60 800 Dr Effect on account balances: Purchases increased $3 500 Sales decreased $1 200 Inventory increased $5 600 (b) The correct ending inventory is $60 800. Exercise 13.2 Inventory cost flow methods — periodic inventory system Inventories and purchases for the month of June for Glow Light Ltd are as follows: Required (a) Determine the cost of sales for the month under each of the following cost flow assumptions, based on the periodic inventory system: i. FIFO ii. weighted average. (LO2) i. Cost of sales – FIFO: From inventory, 1 June 9 000 units @ $18.00 $162 000 From purchase of 3 June 8 500 units @ $19.00 161 500 From purchase of 15 June 10 500 units @ $20.00 210 000 28 000 units $533 500 ii. Cost of sales – weighted average: Average cost per unit — $909 000 46 000 = $19.76 Cost of sales — 28 000 @ $19.76 = $553 280 Exercise 13.3 Lower of cost and net realisable value The inventory of Gordon Ltd contains the following items at 30 June 2019. Required (a) Determine the ending inventory value at 30 June 2019, applying the lower of cost and net realisable value rule to the individual items. (b) What effect did application of the rule rather than cost have on the financial statements of the company? (LO5) (a) Inventory Item Units on Hand Cost per Unit Total Cost Net Realisable Value per Unit LC and NRV of Individual Items 3011 75 $3.00 $225.00 $2.60 $195.00 2507 30 7.00 210.00 8.50 210.00 601 20 30.00 600.00 27.00 540.00 4500 50 3.50 175.00 2.50 125.00 2825 40 6.00 240.00 7.00 240.00 $1 450.00 $1 310.00 (b) Profit is reduced by $100 ($1450 – $1310). In the balance sheet/statement of financial position, inventory, total assets and equity are all reduced by $140. Exercise 13.4 Net realisable value Non-GST version Value Vehicles is a car dealership. One of its models was used as a demonstrator during the year. Presented below is information relating to the demonstrator vehicle as of 30 June 2019, the end of the current financial year. Ignore GST. Required (a) From the information above, determine the net realisable value at which the demonstrator vehicle should be reported in the 30 June 2019 financial statements. Is there an effect on profit reported for the current period? Explain. (LO5) (a) Estimated sales price $23 500 Less: Selling and disposal cost 1 800 Net realisable value $21 700 This demonstrator would be reported at $21 700. As the net realisable value is less than its original cost of $22 000, profit will be reduced by $300, i.e. ($22 000 – $21 700) in the current period. Exercise 13.4 Net realisable value GST version Value Vehicles is a car dealership. One of its models was used as a demonstrator during the year. Presented below is information relating to the demonstrator vehicle as of 30 June 2019, the end of the current financial year. Normal sales price (GST inclusive) Original cost (GST Inclusive) Estimated sales value in existing condition Estimated selling and disposal cost $32 989 24 200 23 500 1 800 Required (a) From the information above, determine the net realisable value at which the demonstrator vehicle should be reported in the 30 June 2019 financial statements. Is there an effect on profit reported for the current period? Explain. (LO5) (a) Estimated sales price $23 500 Less: Selling and disposal cost 1 800 Net realisable value $21 700 This demonstrator vehicle would be reported at a net realisable value of $21 700. As the net realisable value is less than its original cost of $22 000 ($24 200 less GST $2200 = $22,000 cost), profit will be reduced by $300, i.e. ($22 000 – $21 700) in the current period. Exercise 13.5 Inventory cost methods — perpetual inventory system Non-GST version The following information relates to the inventory of Gadgets Ltd during May. Gadgets Ltd uses a perpetual inventory system. Ignore GST. Required Determine the cost of the ending inventory (assuming there have been no stock losses) and the cost of sales, using the following three methods: (a) the moving average; round unit cost to the nearest cent. (b) specific identification; assume that the ending inventory on 31 May consisted of 13 units from the beginning inventory, 24 units from the 3 May purchase, and the remainder from the 10 May purchase. (c) FIFO. (LO3) (a) Moving average method: Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Unit Unit Cost Total Cost Units Unit Cost Total Cost 1/5 Beg. Invent. 80 $7.00 $560.00 3/5 Purchases 90 $8.00 $720 170 7.53 1 280.00 10/5 Purchases 110 9.00 990 280 8.11 2 270.00 12/5 Sales 90 $8.11 $729.90 190 8.11 1 540.10 17/5 Sales 80 8.11 648.80 110 8.11 891.30 0 25/5 Sales 30 8.11 243.30 80 8.11 648.00 $1 622 *Differences due to rounding. Ending inventory $648.00. Cost of sales $1 622. (b) Specific identification: Ending inventory: 13 units @ $7.00 $91.00 24 units @ $8.00 192.00 43 units @ $9.00 387.00 80 units $670.00 Cost of sales 67 units @ $7.00 $469.00 66 units @ $8.00 528.00 67 units @ $9.00 603.00 200 units $1 600.00 (c) FIFO method: Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/5 Beg. invent. 80 $7.00 $560 3/5 Purchases 90 $8.00 $720.00 80 $7.00 90 $8.00 1 280 10/5 Purchases 110 $9.00 $990.00 80 $7.00 90 $8.00 110 $9.00 2 270 12/5 Sales 80 $7.00 $560.00 80 $8.00 10 $8.00 $80.00 110 $9.00 1 630 17/5 Sales 80 $8.00 $640.00 110 $9.00 990 25/5 Sales 30 $9.00 $270.00 80 $9.00 720 $1 550.00 Ending inventory $720.00. Cost of sales $1550.00. Exercise 13.5 Inventory cost methods — perpetual inventory system GST version The following information relates to the inventory of Gadgets Ltd during May. May 1 3 10 12 17 25 Beginning Inventory Purchased Purchased Sold Sold Sold 80 90 110 90 80 30 units units units units units units @ $7.00 @ $8.80 @ $9.90 Gadgets Ltd uses a perpetual inventory system, purchases are GST inclusive. Required Determine the cost of the ending inventory (assuming there have been no stock losses) and the cost of sales, using the following three methods: (a) the moving average; round unit cost to the nearest cent. (b) specific identification; assume that the ending inventory on 31 May consisted of 13 units from the beginning inventory, 24 units from the 3 May purchase, and the remainder from the 10 May purchase. (c) FIFO. (LO3) (a) Moving average method: Note: GST needs to be removed from the purchase price of goods purchased on 3rd and 10th May. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Unit Unit Cost Total Cost Units Unit Cost Total Cost 1/5 Beg. Invent. 80 $7.00 $560.00 3/5 Purchases 90 $8.00 $720 170 7.53 1 280.00 10/5 Purchases 110 9.00 990 280 8.11 2 270.00 12/5 Sales 90 $8.11 $729.90 190 8.11 1 540.10 17/5 Sales 80 8.11 648.80 110 8.11 891.30 0 25/5 Sales 30 8.11 243.30 80 8.11 648.00 $1 622 *Differences due to rounding. Ending inventory $648.00. Cost of sales $1 622. (b) Specific identification: Ending inventory: 13 units @ $7.00 $91.00 24 units @ $8.00 192.00 43 units @ $9.00 387.00 80 units $670.00 Cost of sales 67 units @ $7.00 $469.00 66 units @ $8.00 528.00 67 units @ $9.00 603.00 200 units $1 600.00 (c) FIFO method: Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/5 Beg. invent. 80 $7.00 $560 3/5 Purchases 90 $8.00 $720.00 80 $7.00 90 $8.00 1 280 10/5 Purchases 110 $9.00 $990.00 80 $7.00 90 $8.00 110 $9.00 2 270 12/5 Sales 80 $7.00 $560.00 80 $8.00 10 $8.00 $80.00 110 $9.00 1 630 17/5 Sales 80 $8.00 $640.00 110 $9.00 990 25/5 Sales 30 $9.00 $270.00 80 $9.00 720 $1 550.00 Ending inventory $720.00. Cost of sales $1550.00. Exercise 13.6 FIFO and average cost flow methods — periodic and perpetual inventory systems Non-GST version The following information relates to the inventory of a bookseller in the records of Bayside Books Ltd, a company registered for GST. All unit prices below exclude GST. Required (a) Using a periodic system and the weighted average method, calculate the cost of the 11 items in inventory on 30 June and the cost of sales for the year. (b) Using a perpetual system and the moving average method, calculate the cost of the year-end inventory and the cost of sales. (c) Using a periodic system and the FIFO method, determine the cost of the 11 items in inventory on 30 June and the cost of sales for the year. (d) Using a perpetual system and the FIFO method, determine the cost of the year-end inventory and the cost of sales. (e) Compare the results obtained under requirements (a), (b), (c) and (d) above. (LO2, LO3 and LO4) (a) Weighted average method: Periodic. Ending inventory = 11 average cost $38.47 = $423.17 Average cost = = $1308 / 34 units = $38.47 per unit Goods available for sale = 1308.00 Less ending inventory (423.17) Cost of sales 884.83 (b) Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/7 Beg. invent. 8 $35.00 $280.00 14/8 Purchases 11 $38 $418 19 $36.74 $698.00 25/9 Sales 9 $36.74 $330.66 10 $36.74 $367.34 8/1 Purchases 10 $40 $400 20 $38.37 $767.34 3/3 Purchases 5 $42 $210 25 $39.09 $977.34 13/4 Sales 11 $39.09 $429.99 14 $39.09 $547.35 10/6 Sales 3 $39.09 $117.27 11 $39.09 $430.08 $877.92 Ending inventory $430.08. Cost of sales $877.92. (c) FIFO: Periodic. Ending inventory: 5 units @ $42.00 $210.00 6 units @ $40.00 $240.00 11 units $450.00 Cost of sales = $1308 – $450 = $858 8 units @ $35.00 $280.00 11 units @ $38.00 $418.00 4 units @ $40.00 $160.00 23 units $858.00 Goods available for sale Less ending inventory Cost of goods available for sale 1308 (450) 858 (d) FIFO: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/7 Beg. invent. 8 $35.00 $280 14/8 Purchases 11 $38 $418 8 $35.00 11 $38.00 $698 25/9 Sales 8 $35.00 $280.00 1 $38.00 $38.00 10 $38.00 $380 8/1 Purchases 10 $40 $400 10 $38.00 10 $40.00 $780 3/3 Purchases 5 $42 $210 10 $38.00 10 $40.00 5 $42.00 $990 13/4 Sales 10 $38.00 $380.00 9 $40.00 1 $40.00 $40.00 5 $42.00 $570 10/6 Sales 3 $40.00 $120.00 6 $40.00 5 $42.00 $450 $858.00 Ending inventory $450.00. Cost of sales $858.00. (e) FIFO reported the same ending inventory balance and cost of sales under the periodic and perpetual system. The reported ending inventory balance and cost of sales for all options only resulted in slight variations. The highest ending inventory balance was recorded using FIFO. The lowest inventory balance was recorded using the weighted average method (periodic). In all cases, the cost of sales is inversely related to ending inventory, i.e. the highest inventory balance corresponds with the lowest reported cost of sales and the lowest ending inventory balance corresponds with the highest cost of sales calculation. Exercise 13.6 FIFO and average cost flow methods — periodic and perpetual inventory systems GST version The following information relates to the inventory of a bookseller in the records of Bayside Books Ltd, a company registered for GST. All purchases of inventory are GST inclusive. July 1 Aug. 14 Sept. 25 Jan. 8 Mar. 3 Apr. 13 Jun. 10 Beginning Inventory Purchased Sold Purchased Purchased Sold Sold 8 11 9 10 5 11 3 @ $35.00 = $280.00 @ $41.80 = $459.80 @ $44.00 = $440.00 @ $46.20 = $231.00 Required (a) Using a periodic system and the weighted average method, calculate the cost of the 11 items in inventory on 30 June and the cost of sales for the year. (b) Using a perpetual system and the moving average method, calculate the cost of the year-end inventory and the cost of sales. (c) Using a periodic system and the FIFO method, determine the cost of the 11 items in inventory on 30 June and the cost of sales for the year. (d) Using a perpetual system and the FIFO method, determine the cost of the year-end inventory and the cost of sales. (e) Compare the results obtained under requirements A, B, C and D above. (LO2, LO3 and LO4) Note: it is necessary to remove the GST component from the goods purchased before calculating the value of inventory. Aug 14 $459.80 – GST 41.80 = $418, per unit $38.00 Jan 8 $440.00 – GST 40.00 = $400, per unit $40.00 Mar 3 $231.00 – GST 21.00 = $210, per unit $42.00 (a) Weighted average method: Periodic. Ending inventory = 11 average cost $38.47 = $423.17 Average cost = = $1308 / 34 units = $38.47 per unit Goods available for sale = 1308.00 Less ending inventory (423.17) Cost of sales 884.83 (b) Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/7 Beg. invent. 8 $35.00 $280.00 14/8 Purchases 11 $38 $418 19 $36.74 $698.00 25/9 Sales 9 $36.74 $330.66 10 $36.74 $367.34 8/1 Purchases 10 $40 $400 20 $38.37 $767.34 3/3 Purchases 5 $42 $210 25 $39.09 $977.34 13/4 Sales 11 $39.09 $429.99 14 $39.09 $547.35 10/6 Sales 3 $39.09 $117.27 11 $39.09 $430.08 $877.92 Ending inventory $430.08. Cost of sales $877.92. (c) FIFO: Periodic. Ending inventory: 5 units @ $42.00 $210.00 6 units @ $40.00 $240.00 11 units $450.00 Cost of sales = $1308 – $450 = $858 8 units @ $35.00 $280.00 11 units @ $38.00 $418.00 4 units @ $40.00 $160.00 23 units $858.00 Goods available for sale Less ending inventory Cost of goods available for sale 1308 (450) 858 (d) FIFO: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/7 Beg. invent. 8 $35.00 $280 14/8 Purchases 11 $38 $418 8 $35.00 11 $38.00 $698 25/9 Sales 8 $35.00 $280.00 1 $38.00 $38.00 10 $38.00 $380 8/1 Purchases 10 $40 $400 10 $38.00 10 $40.00 $780 3/3 Purchases 5 $42 $210 10 $38.00 10 $40.00 5 $42.00 $990 13/4 Sales 10 $38.00 $380.00 9 $40.00 1 $40.00 $40.00 5 $42.00 $570 10/6 Sales 3 $40.00 $120.00 6 $40.00 5 $42.00 $450 $858.00 Ending inventory $450.00 Cost of sales $858.00 (e) FIFO reported the same ending inventory balance and cost of sales under the periodic and perpetual system. The reported ending inventory balance and cost of sales for all options only resulted in slight variations. The highest ending inventory balance was recorded using FIFO. The lowest inventory balance was recorded using the weighted average method (periodic). In all cases, the cost of sales is inversely related to ending inventory, i.e. the highest inventory balance corresponds with the lowest reported cost of sales and the lowest ending inventory balance corresponds with the highest cost of sales calculation. Exercise 13.7 FIFO and moving average methods — perpetual inventory Non-GST version Chelsea’s Cameras Ltd records its inventory of digital cameras by using a perpetual inventory system on a FIFO basis. The following details are supplied for one particular popular make and model for the month of November. Ignore GST. Required (a) Prepare an inventory record showing the above transactions. (b) Assuming instead that the company uses the moving average method of recording cost of sales, calculate the cost of sales and ending inventory balance for the month of November and compare your answers with those from requirement (a). (LO3 and LO4) (a) FIFO: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/11 Beg. invent. 18 $160 $2 880 2/11 Purchases 10 $150 $1 500 18 160 2 880 10 150 1 500 4/11 Sales 16 $160 $2 560 2 160 320 10 150 1 500 20/11 Purchases 20 $165 $3 300 2 $160 320 10 150 1 500 20 $165 3 300 22/11 Sales 2 $160 320 10 150 1 500 10 165 1 650 10 $165 1 650 25/11 Purchases 30 $158 $4 740 10 $165 1 650 30 158 4 740 29/11 Sales 10 $165 $1 650 10 158 1 580 20 $158 3 160 $9 260 Ending inventory $3160. Cost of sales $9260. (b) Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/11 Beg. invent. 18 $160.00 $2 880.00 2/11 Purchases 10 $150 $1 500 28 156.43 4 380.00 4/11 Sales 16 $156.43 $2 502.88 12 156.43 1 877.12 20/11 Purchases 20 $165 $3 300 32 161.785 5 177.12 22/11 Sales 22 161.785 $3 559.27 10 161.785 1 617.85 25/11 Purchases 30 $158 $4 740 40 $158.95 6 357.85 29/11 Sales 20 $158.95 $3 179.00 20 $158.95 3 178.85 $9 241.15 Ending inventory $3178.85. Cost of sales $9241.15. Under the FIFO method in (a). above, ending inventory consists of the most recent purchases. Since the most recent purchases were at lower prices than earlier in the month, the ending inventory balance is lower than under the moving average approach in (b). above. Cost of sales is correspondingly higher. Exercise 13.7 FIFO and moving average methods — perpetual inventory GST version Chelsea’s Cameras Ltd records its inventory of digital cameras by using a perpetual inventory system on a FIFO basis. The following details are supplied for one particular popular make and model for the month of November. Nov. 1 Inventory on hand consisted of 18 cameras costed at $160 each. Purchases: Nov. 2 Nov. 20 Nov. 25 10 cameras at $165 each (GST inclusive) 20 cameras at $181.50 each (GST inclusive) 30 cameras at $173.80 each (GST inclusive) Sales: Nov. 4 Nov. 22 Nov. 29 16 cameras at $319 each (GST inclusive) 22 cameras at $319 each (GST inclusive) 20 cameras at $341 each (GST inclusive) Required (a) Prepare an inventory record showing the above transactions. (b) Assuming instead that the company uses the moving average method of recording cost of sales, calculate the cost of sales and ending inventory balance for the month of November and compare your answers with those from requirement (a). (LO3 and LO4) Note: it is necessary to remove the GST component from the purchases of inventory. Nov 2 10 x ($165.00 – GST $15.00 = $150.00 per unit) = $1500 Nov 20 20 x ($181.50 – GST $16.50 = $165.00 per unit) = $3300 Nov 25 30 x ($173.80 – GST $15.80 = $158.00 per unit) = $3950 (a) FIFO: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/11 Beg. invent. 18 $160 $2 880 2/11 Purchases 10 $150 $1 500 18 160 2 880 10 150 1 500 4/11 Sales 16 $160 $2 560 2 160 320 10 150 1 500 20/11 Purchases 20 $165 $3 300 2 $160 320 10 150 1 500 20 $165 3 300 22/11 Sales 2 $160 320 10 150 1 500 10 165 1 650 10 $165 1 650 25/11 Purchases 30 $158 $4 740 10 $165 1 650 30 158 4 740 29/11 Sales 10 $165 $1 650 10 158 1 580 20 $158 3 160 $9 260 Ending inventory $3160. Cost of sales $9260. (b) Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/11 Beg. invent. 18 $160.00 $2 880.00 2/11 Purchases 10 $150 $1 500 28 156.43 4 380.00 4/11 Sales 16 $156.43 $2 502.88 12 156.43 1 877.12 20/11 Purchases 20 $165 $3 300 32 161.785 5 177.12 22/11 Sales 22 161.785 $3 559.27 10 161.785 1 617.85 25/11 Purchases 30 $158 $4 740 40 $158.95 6 357.85 29/11 Sales 20 $158.95 $3 179.00 20 $158.95 3 178.85 $9 241.15 Ending inventory $3178.85. Cost of sales $9241.15. Under the FIFO method in (a). above, ending inventory consists of the most recent purchases. Since the most recent purchases were at lower prices than earlier in the month, the ending inventory balance is lower than under the moving average approach in (b). above. Cost of sales is correspondingly higher. Exercise 13.8 Perpetual inventory system and physical stocktake Non-GST version Bristols Bicycles maintains inventory records under the perpetual inventory system. At 30 June 2019, the inventory balance determined by the system showed a value of $300 000. However, on conducting a physical stocktake, ending inventory was calculated as being only $260 000. An investigation revealed that the difference was due to two factors: 1. bicycle theft, amounting to $32 000 2. destruction of parts on bicycles exhibited in the shop, $8000. Bicycle sales for the year amounted to $1 000 000, cost price of goods sold amounted to $480,000, purchases were $560 000 and the balance of inventory on hand at the beginning of the year was $220 000. Required (a) Prepare the Cost of Sales and Inventory Control ledger accounts for the year ended 30 June 2019. (LO3) (a) GENERAL LEDGER Cost of Sales No. Date Explanation Post Ref. Debit Credit Balance June 30 Inventory SJ $480 000 $480 000 Inventory Control No. Date Explanation Post Ref. Debit Credit Balance June 1 Balance $220 000 30 Purchases PJ $560 000 780 000 30 Cost of sales SJ 480 000 300 000 30 Theft and damages expense GJ 40 000 260 000 Exercise 13.8 Perpetual inventory system and physical stocktake GST version Bristols Bicycles maintains inventory records under the perpetual inventory system. At 30 June 2019, the inventory balance determined by the system showed a value of $300 000. However, on conducting a physical stocktake, ending inventory was calculated as being only $260 000. An investigation revealed that the difference was due to two factors: 1. bicycle theft, amounting to $35 200 (GST inclusive) 2. destruction of parts on bicycles exhibited in the shop, $8800 (GST inclusive). Bicycle sales for the year amounted to $1 100 000 (GST inclusive), cost price of goods sold amounted to $480,000, purchases were $616 000 (GST inclusive) and the balance of inventory on hand at the beginning of the year was $220 000. Required (a) Prepare the Cost of Sales and Inventory Control ledger accounts for the year ended 30 June 2019. (LO3) (a) Note: need to remove the GST component from: • The value of bicycle theft ($35200 – GST 3200 = $32000). • Destruction of parts ($8800 – GST $800 = $8000). • Purchases of inventory ($616000 – GST $56,000 = $560,000). GENERAL LEDGER Cost of Sales No. Date Explanation Post Ref. Debit Credit Balance June 30 Inventory SJ $480 000 $480 000 Inventory Control No. Date Explanation Post Ref. Debit Credit Balance June 1 Balance $220 000 30 Purchases PJ $560 000 780 000 30 Cost of sales SJ 480 000 300 000 30 Theft and damages expense GJ 40 000 260 000 Exercise 13.9 FIFO and gross profit ratio — perpetual inventory systems Non-GST version Soakwell Supplies Ltd manufactures and sells soakwells for use in suburban and light industrial areas of Perth. Over the past year, the cost of manufacturing the soakwells has gradually risen and the company has been required to increase inventory levels to meet expected demand in the new year, which has been forecast to bring better-than-average rainfall. At 1 July 2019, the company had 40 soakwells on hand, which had cost $200 each to make. The selling price of each soakwell remained at $400 in 2019 but was raised to $470 in 2020. Ignore GST. During the year ended 30 June 2020, details of soakwells completed and sold are as follows. Required (a) Prepare the perpetual inventory record for soakwells for the year on the basis of FIFO. (b) How much gross profit has been generated for the year from the sale of soakwells? (c) What is the gross profit ratio achieved by the company in the year ended 30 June 2020? (d) What value is placed on the inventory of soakwells at 30 June 2020? (LO3 and LO10) (a) FIFO: Perpetual. Finished goods Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 2019 1/7 Begin bal 40 $200 $8 000 31/8 Made 45 $220 $9 900 40 $200 $8 000 45 220 9 900 30/9 Sales 40 $200 $8 000 10 220 2 200 35 $220 $7 700 31/10 Made 55 $240 $13 200 35 $220 $7 700 55 240 13 200 30/11 Sales 35 $220 $7 700 30 240 7 200 25 $240 $6 000 2020 31/1 Made 65 $270 $17 550 25 $240 $6 000 65 270 17 550 28/2 Sales 25 $240 $6 000 50 270 13 500 15 $270 $4 050 31/5 Made 85 $300 $25 500 15 $270 $4 050 85 300 25 500 30/6 Sales 15 $270 $4 050 55 300 16 500 30 $300 $9 000 $65150 Ending inventory $9000. Cost of sales $65 150. (b) Gross profit: • Sales (50 + 65) $400 + (75 + 70) $470 = $114 150 • Cost of sales = $65 150 Therefore, gross profit = $114 150 – $65 150 = $49 000. (c) Gross profit ratio = Gross profit Net sales = $49 000 $114 150 = 42.93% (d) Inventory of soakwells = 30 $300 = $9000. Exercise 13.9 FIFO and gross profit ratio — perpetual inventory systems GST version Soakwell Supplies Ltd manufactures and sells soakwells for use in suburban and light industrial areas of Perth. Over the past year, the cost of manufacturing the soakwells has gradually risen and the company has been required to increase inventory levels to meet expected demand in the new year, which has been forecast to bring better-than-average rainfall. At 1 July 2019, the company had 40 soakwells on hand, which had cost $200 each to make. The selling price of each soakwell remained at $440 (GST inclusive) in 2019 but was raised to $517 (GST inclusive) in 2020. During the year ended 30 June 2020, details of soakwells completed and sold are as follows. Required (a) Prepare the perpetual inventory record for soakwells for the year on the basis of FIFO. (b) How much gross profit has been generated for the year from the sale of soakwells? (c) What is the gross profit ratio achieved by the company in the year ended 30 June 2020? (d) What value is placed on the inventory of soakwells at 30 June 2020? (LO3 and LO10) (a) FIFO: Perpetual. Finished goods Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 2019 1/7 Begin bal 40 $200 $8 000 31/8 Made 45 $220 $9 900 40 $200 $8 000 45 220 9 900 30/9 Sales 40 $200 $8 000 10 220 2 200 35 $220 $7 700 31/10 Made 55 $240 $13 200 35 $220 $7 700 55 240 13 200 30/11 Sales 35 $220 $7 700 30 240 7 200 25 $240 $6 000 2020 31/1 Made 65 $270 $17 550 25 $240 $6 000 65 270 17 550 28/2 Sales 25 $240 $6 000 50 270 13 500 15 $270 $4 050 31/5 Made 85 $300 $25 500 15 $270 $4 050 85 300 25 500 30/6 Sales 15 $270 $4 050 55 300 16 500 30 $300 $9 000 $65150 Ending inventory $9000. Cost of sales $65 150. (b) Gross profit: • Sales (50 + 65) $400 + (75 + 70) $470 = $114 150 • Cost of sales = $65 150 Therefore, gross profit = $114 150 – $65 150 = $49 000 (c) Gross profit ratio = Gross profit Net sales = $49 000 $114 150 = 42.93% (d) Inventory of soakwells = 30 $300 = $9000. Exercise 13.10 Effects of inventory errors Toowoomba Irrigation Ltd began operations in the south-east Queensland region in July 2015. During the annual audit for the year ended 30 June 2020, it was discovered that errors had been made in the annual physical stocktake. Further investigation revealed the following details for the years ended 30 June. 2016: Ending inventory was undervalued by $60 000. 2017: Ending inventory was overvalued by $15 000. 2018: Ending inventory was undervalued by $40 000. 2019: Ending inventory was correctly valued. 2020: Ending inventory was overvalued by $30 000. Required (a) Explain the effects that the errors would have on the profit figure and ending asset balances for each year, and determine the cumulative effect of the errors over the five-year period. (LO7) (a) 2016: If inventory is undervalued by $60 000 for the year, this means that cost of sales has been overstated, and that profit is understated by $60 000 in 2013. 2017: If beginning inventory is undervalued by $60 000, this means that cost of sales is undervalued by $60 000 as the beginning inventory is sold. Hence, profit is overstated by $60 000. If ending inventory is overvalued by $15 000, this means that cost of sales is undervalued by $15 000 and profit is overstated by $15 000. Hence, the total impact on profit in 2017 is an overstatement by $75 000. 2018: If beginning inventory is overvalued by $15 000, this means that cost of sales is overvalued by $15 000 as the beginning inventory is sold. Hence, profit is understated by $15 000. If ending inventory is undervalued by $40 000, this means that cost of sales is overvalued by $40 000 and profit is understated by $40 000. Hence, the total impact on profit in 2018 is an understatement by $55 000. 2019: If beginning inventory is undervalued by $40 000, this means that cost of sales is undervalued by $40 000 as the beginning inventory is sold. Hence, profit is overstated by $40 000. If ending inventory is correctly valued by $15 000, this means that there is no further impact on cost of sales. Hence, the total impact on profit in 2019 is an overstatement by $40 000. 2020: If beginning inventory is correct there is no carryover effect from the previous year on cost of sales. If ending inventory is overvalued by $30 000, the cost of sales at the end of the year will be undervalued and profit for the year 2020 will be overstated by $30 000. The cumulative effect of these errors over 5 years is an overstatement of profit for only $30 000, being the effect in the last year, 2020. As the inventory was correct at the end of 2019, the cumulative effect of errors between 2015 and 2019 becomes zero. Exercise 13.11 Effects of inventory errors Brown Brothers’s income statements for the past 3 years are as shown below. Because of errors, the 2018 ending inventory is understated by $2000 and the 2019 ending inventory is overstated by $6000. The 2020 ending inventory is correct. Required (a) Determine the correct amount of profit for each of the 3 years. (b) Determine the total profit for the 3-year period as shown and as corrected. (LO7 and LO9) (a) 2018 2019 2020 Net sales $68 000 $78 000 $70 000 Beginning inventory 16 000 16 000 14 000 Net purchases 30 000 36 000 22 000 Goods available for sale 46 000 52 000 36 000 Ending inventory 16 000 14 000 12 000 Cost of sales 30 000 38 000 24 000 Gross profit 38 000 40 000 46 000 Other expenses 16 000 14 000 19 000 Profit $22 000 $26 000 $27 000 (b) Total profit as originally shown: • $20 000 + $34 000 + $21 000 = $75 000 • Corrected total profit as per (a). • $22 000 + $26 000 + $27 000 = $75 000 • Total profit for the three years remains the same. Inventory errors are eliminated over time. Exercise 13.12 Retail inventory and gross profit methods Non-GST version Part A Branxton Ltd’s inventory on 1 April 2019 had a cost of $100 000 and a retail value of $170 000. During April, the company’s net purchases cost $216 000 and had a net retail value of $324 000. Net sales for April totalled $390 000. Ignore GST. Required (a) Calculate estimated cost of the inventory at 30 April 2019 using the retail inventory method. (b) What key assumptions underlie the validity of this estimate of inventory cost? Part B On 18 July, the warehouse storing the inventory of Thomas Ltd was destroyed by a fire. The insurance company asked the managing director to prove his inventory loss. Available records indicated that the beginning inventory was $320 000. Sales up to 18 July were $1 082 000, sales returns were $60 000, and it was company policy to mark-up goods in such a way as to have a gross profit of 40%. Purchases totalled $920 000, purchases returns were $22 000, and freight inwards was $6800. Ignore GST. Required (a) Determine the amount of Thomas Ltd’s claim for the inventory loss. (LO8) Part A (a) Cost Selling Price Inventory, 1 April 2019 $100 000 $170 000 Net purchases 216 000 324 000 Total merchandise available 316 000 494 000 Cost-to-retail percentage: $316 000/$494 000 = 64% Less: Sales during period 390 000 Estimated ending inventory at retail prices $104 000 Applicable cost percentage 64% Estimated ending inventory at cost, 30 April $66 560 (b) The accuracy of the retail method depends upon the assumption that the ending inventory contains the same relative proportions of goods at various mark-ups as the goods available for sale. Part B (a) Beginning inventory $320 000 Net purchases 904 800 Cost of goods available for sale 1 224 800 Net sales $1 022 000 Estimated gross profit (40%) (408 800) Estimated cost of sales 613 200 Estimated inventory lost by fire $611 600 Exercise 13.12 Retail inventory and gross profit methods GST version Part A Branxton Ltd’s inventory on 1 April 2019 had a cost of $100 000 and a retail value of $187 000 (GST inclusive). During April, the company’s net purchases cost $237 600 (GST inclusive) and had a net retail value of $356 400 (GST inclusive). Net sales for April totalled $429 000 (GST Inclusive). Required (a) Calculate estimated cost of the inventory at 30 April 2019 using the retail inventory method. (b) What key assumptions underlie the validity of this estimate of inventory cost? Part B On 18 July, the warehouse storing the inventory of Thomas Ltd was destroyed by a fire. The insurance company asked the managing director to prove his inventory loss. Available records indicated that the beginning inventory was $320 000. Sales up to 18 July were $1 190 200 (GST inclusive), sales returns were $66 000 (GST Inclusive), and it was company policy to mark-up goods in such a way as to have a gross profit of 40%. Purchases totalled $1 012 000 (GST inclusive), purchases returns were $24 200 (GST inclusive), and freight inwards was $7480 (GST inclusive). Required (a) Determine the amount of Thomas Ltd’s claim for the inventory loss. (LO8) Part A (a) Cost Selling Price excl GST Inventory, 1 April 2019 $100 000 $170 000 Net purchases 216 000 324 000 Total merchandise available 316 000 494 000 Cost-to-retail percentage: $316 000/$494 000 = 64% Less: Sales during period 390 000 Estimated ending inventory at retail prices $104 000 Applicable cost percentage 64% Estimated ending inventory at cost, 30 April $66 560 (b) The accuracy of the retail method depends upon the assumption that the ending inventory contains the same relative proportions of goods at various mark-ups as the goods available for sale. Part B (a) Beginning inventory $320 000 Net purchases: excluding GST = (920000 – 22000 + 6800) 904 800 Cost of goods available for sale 1 224 800 Net sales: excl GST = (1082000 – 60000) $1 022 000 Estimated gross profit (40%) (408 800) Estimated cost of sales 613 200 Estimated inventory lost by fire $611 600 Exercise 13.13 Retail inventory method Non-GST version Biancardi Ltd, a retail business, took a physical stocktake of inventory at retail price at the end of the current year and determined that the total retail value of the ending inventory was $190 000. The following information for the year is available. Management estimates its inventory loss from theft and other causes by comparing its physical ending inventory at retail prices with an estimated ending inventory at retail prices (determined by subtracting goods available for sale at selling prices from sales) and reducing this difference to cost by applying the proper cost ratio. Required (a) Calculate the estimated cost of the ending inventory using the retail inventory method. This is the inventory amount that will appear in the balance sheet, and the calculation should be based on the physical inventory taken at retail prices. (b) Calculate the estimated inventory loss for the year from theft and other causes. (LO8) (a) Cost Selling Price Beginning inventory $108 000 $160 000 Net purchases 486 000 740 000 Total merchandise available 594 000 900 000 Cost-to-retail percentage: $594 000/$900 000 = 66% Less: Sales during period 704 000 Estimated ending inventory at retail prices $196 000 Applicable cost percentage 66% Estimated ending inventory at cost $129 360 Estimated cost of inventory based on physical stocktake = 66% $190 000 = $125 400 (b) Estimated inventory loss from theft and other causes = $129 360 – $125 400 = $3960 Exercise 13.13 Retail inventory method GST version Biancardi Ltd, a retail business, took a physical stocktake of inventory at retail price at the end of the current year and determined that the total retail value of the ending inventory was $209 000 (GST Inclusive). The following information for the year is available. Cost Selling price incl GST Beginning inventory Net purchases Sales $108 000 486 000 $176 000 814 000 774 400 Management estimates its inventory loss from theft and other causes by comparing its physical ending inventory at retail prices with an estimated ending inventory at retail prices (determined by subtracting goods available for sale at selling prices from sales) and reducing this difference to cost by applying the proper cost ratio. Required (a) Calculate the estimated cost of the ending inventory using the retail inventory method. This is the inventory amount that will appear in the balance sheet, and the calculation should be based on the physical inventory taken at retail prices. (b) Calculate the estimated inventory loss for the year from theft and other causes. (LO8) (a) Note: GST needs to be excluded from prices: • Ending inventory: selling price ($209 000 – GST $19 000 = $190 000). • Beginning inventory: selling price ($176 000 – GST $16 000 = $160 000). • Net purchases: selling price ($814 000 - $74,000 = $740 000). • Sales: selling price ($774 400 – GST 70 400 = $704 000). Cost Selling Price Beginning inventory $108 000 $160 000 Net purchases 486 000 740 000 Total merchandise available 594 000 900 000 Cost-to-retail percentage: $594 000/$900 000 = 66% Less: Sales during period 704 000 Estimated ending inventory at retail prices $196 000 Applicable cost percentage 66% Estimated ending inventory at cost $129 360 Estimated cost of inventory based on physical stocktake = 66% $190 000 = $125 400 (b) Estimated inventory loss from theft and other causes = $129 360 – $125 400 = $3960 Exercise 13.14 Cost of sales under FIFO Felton Ltd’s inventory transactions for November 2019 were as shown below: Required (a) Using the information shown and assuming no losses of inventory, if Felton Ltd uses the periodic inventory system with the FIFO cost flow method, calculate the cost of sales for November 2019. (b) Using the information shown, if Felton Ltd uses the perpetual system with the moving average cost flow method, what would be the unit cost of the 23 November sale? (LO2 and LO3) (a) FIFO: Periodic. Cost of sales (135 –15) units + 90 units): 50 units @ $11.00 $550.00 160 units @ $12.00 $1 920.00 210 units $2 470.00 (b) Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 1/11 Beg. invent. 50 $11.00 $550.00 6/11 Purchase 170 $12 $2 040 220 $11.77 $2 590.00 10/11 Sale 90 $11.77 $1059.30 130 $11.77 $1 530.70 14/11 Purchase 90 $13 $1 170 220 $12.28 $2 700.70 18/11 Purchase return (30) $13 $(390) 190 $12.16 $2 310.70 23/11 Sale 135 $12.16 1 641.60 55 $12.16 $669.10 28/11 Sales return (15) $12.16 (182.40) 70 $12.16 $851.50 Unit cost of the sales on 23 November = $12.16. Exercise 13.15 Effects of inventory errors (a) Explain the effect of each of the following errors in the ending inventory of a retail business. i. Incorrectly included 100 units of Commodity A, valued at $1 per unit, in the ending inventory; the purchase was recorded. ii. Incorrectly included 200 units of Commodity B, valued at $2 per unit, in the ending inventory; the purchase was not recorded. iii. Incorrectly excluded 300 units of Commodity C, valued at $3 per unit, from the ending inventory; the purchase was recorded. iv. Incorrectly excluded 400 units of Commodity D, valued at $4 per unit, from the ending inventory; the purchase was not recorded. (b) In determining the unit cost for inventory purposes, discuss how the following items should be treated? i. freight on goods and materials purchased. ii. purchase returns iii. discount received. (LO7) (a) (i) It seems that the inventory was not yet on hand but incorrectly included in the stocktake; this means that the purchase of inventory should not have been recorded. This appears to be a case of the seller shipping goods to the buyer under shipping terms of DPP (seller pays freight to the buyer’s warehouse), and the goods have not yet reached the warehouse of the buyer. Thus, the 100 units of Commodity A should not be included in inventory and the purchase should not have been recorded. The impact of this error is on the income statement is zero, as cost of sales is not affected. However, on the balance sheet/statement of financial position, inventory is overstated by $100 and accounts payable is overstated by $100. The error can be corrected at the end of the period by reversing the entry to record the purchase. (ii) Assume that it was correct for the purchase not to be recorded. In this case it appears that the 200 units of Commodity B have been incorrectly included in the inventory stocktake. This will have an impact of understating cost of sales and overstating profits if the periodic inventory system is used (ending inventory in the stocktake is too high). Under the perpetual inventory system, the error will be found as the stocktake of inventory will not agree with the inventory record for Commodity B. (iii) Assuming the purchase has been recorded correctly, omission of the 300 units of Commodity C from the stocktake will have the impact of overstating cost of sales and understating profits if a periodic inventory system is used (ending inventory is too low by omitting commodity C). Under a perpetual inventory system, the Inventory Control account will not agree with the total of the stocktake, and the error will be discovered. (iv) Assuming that the purchase should have been recorded and that the 400 units of Commodity D should have been included in the stocktake, the impact of this error on profits is zero as cost of sales is unaffected under either the periodic or perpetual inventory systems. However, in the balance sheet/statement of financial position, inventory will be understated and the liability, accounts payable, will also be understated. (b) When determining the unit cost for inventory purposes: (i) Freight costs on goods and materials purchased are required by IAS 2/AASB 102 to be included in the cost of purchase. The standard states: • The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. • However, in practice it is difficult at times to allocate the freight costs to individual items; hence, as a practical compromise, in the income statement, the freight cost is usually added to the cost of purchases (in the periodic inventory system) or to the cost of sales (perpetual inventory system). Thus the freight costs are usually excluded from the unit cost of inventory (ii) Purchase returns are included as part of the calculation of unit cost for inventories. Under the perpetual inventory system, the unit cost is used to determine the amount of refund receivable from the supplier when goods purchased are returned. The inventory record will therefore show purchases returns costed out at the appropriate invoice price. This may have an impact on the unit cost of the inventories remaining if the moving average method is used by the entity. (iii) Refer back to the quote from IAS 2/AASB 102 above. Discounts received (both trade and settlement) are to be deducted in determining the unit cost of inventory. In practice however, the trade discount is usually deducted, but the settlement discount may not be. The reason for this is the difficulty of determining which inventory the settlement discount applies to. Instead, as a compromise, the overall discount received for the period is often deducted in the income statement from the net cost of purchases but not applied to the unit costs of individual inventories. Further discussion of this issue is contained in chapter 6 where the net price method of recording inventories, as opposed to the gross price method, is illustrated. Problems Problem 13.16 Inventory cost flow methods — periodic inventory system Non-GST version The following information relates to the inventory of Margaret’s Megamart Ltd during December. Ignore GST. Margaret’s Megamart Ltd uses the periodic inventory system. During the month, 1300 units were sold for $5525. A physical count on 31 December verified that 700 units were on hand. Required (a) Prepare an income statement down to gross profit for December, using each of the following costing methods: i. specific identification, assuming that 400 units were sold from the beginning inventory, 400 units were sold from the first purchase, 200 units were sold from the 15 December purchase, and the remainder from the 23 December purchase. ii. FIFO iii. LIFO iv. weighted average. (b) Which cost flow method(s) resulted in the highest gross profit on sales? the highest ending inventory? Explain your results. (c) Prepare an income statement down to gross profit for December, using the FIFO and LIFO costing methods and assuming that the 23 December purchase had been delayed until January. (d) The management of Margaret’s Megamart Ltd expects the unit cost to increase to $3.90 excluding GST early in the next period. In anticipation of the price increase, a purchase of 600 additional units was made on 29 December at a unit cost of $3.65 excluding GST. Prepare an income statement down to gross profit for December, using the FIFO and LIFO costing methods. (e) Compare your results obtained in requirements A, C and D. Explain why your results are or are not the same. (LO2, LO4 and LO9) (a) (i) Specific Identification Cost of sales 400 units @ $3.00 $1 200 400 units @ $3.15 1 260 200 units @ $3.30 660 300 units @ $3.50 1 050 1 300 units $4 170 Ending inventory 300 units @ $3.00 $900 100 units @ $3.15 315 100 units @ $3.30 330 200 units @ $3.50 700 700 units $2 245 (ii) FIFO: Units Goods available (per question) 2 000 $6 415 Ending inventory (700 units): 500 units @ $3.50 (500) (1 750) 200 units @ $3.30 (200) (660) Cost of sales 1 300 $4 005 (iii) LIFO: Units Goods available 2 000 $6 415 Ending inventory (700 units): 700 units @ $3.00 (700) (2 100) Cost of sales 1 300 $4 315 (iv) Weighted average: Units Unit Cost Amount Beginning inventory 700 $3.00 $2 100 10/12 Purchase 500 $3.15 1 575 15/12 Purchase 300 $3.30 990 23/12 Purchase 500 $3.50 1 750 Goods available 2 000 $6 415 $6415 2000 = $3.21 per unit (rounded) Goods available 2 000 $3.21 $6 415 Ending inventory (700) $3.21 (2 247) Cost of sales (rounded) 1 300 $4 168 Income Statement Spec. Ident. FIFO LIFO W’ted Av. Sales $5 525 $5 525 $5 525 $5 525 Beginning inventory 2 100 2 100 2 100 2 100 Purchases 4 315 4 315 4 315 4 315 Goods available for sale 6 415 6 415 6 415 6 415 Ending inventory 2 245 2 410 2 100 2 247 Cost of sales 4 170 4 005 4 315 4 168 Gross profit 1 355 1 520 1 210 1 357 (b) The highest gross profit was reported using FIFO. FIFO also reported the highest ending inventory balance since it is valued at the most recent higher prices. This is a result of the direct relationship between inventory values and profit. The higher the value placed on ending inventory, the higher the reported gross profit. (c) Income Statement FIFO LIFO Sales $5 525 $5 525 Beginning inventory 2 100 2 100 Purchases 2 565 2 565 Goods available for sale 4 665 4 665 Ending inventory (200 units) 660 600 Cost of sales 4 005 4 065 Gross profit $1 520 $1 460 (d) Income Statement FIFO LIFO Sales $5 525 $5 525 Beginning inventory 2 100 2 100 Purchases 6 505 6 505 Goods available for sale 8 605 8 605 Ending inventory (1300 units) *4 600 **4 005 Cost of sales 4 005 4 600 Gross profit $1 520 $925 * FIFO **LIFO 200 @ 3.30 = $ 660 700 @ 3.00 = $2 100 500 @ 3.50 = 1 750 500 @ 3.15 = 1 575 600 @ 3.65 = 2 190 100 @ 3.30 = 330 $4 600 $4 005 (e) FIFO reported the same cost of sales and gross profit in all cases. This is because the increases and decreases in ending inventory were offset by the same increases and decreases in purchases. LIFO reported three different cost of sales and gross profit results. This is shows that ending inventory and cost of sales valuations can be altered (manipulated) by recent purchases or non-purchases using LIFO assumptions. Problem 13.16 Inventory cost flow methods — periodic inventory system GST version The following information relates to the inventory of Margaret’s Megamart Ltd during December (GST inclusive). Units Unit Cost GST Total Cost 1/12 Beginning inventory 700 $3.00 $2 100.00 10/12 Purchase 500 3.15 157.50 1 732.50 15/12 Purchase 300 3.30 99.00 1 089.00 23/12 Purchase 500 3.50 175.00 1 925.00 Total 2 000 431.50 6 846.50 Margaret’s Megamart Ltd uses the periodic inventory system. During the month, 1300 units were sold for $6077.50. A physical count on 31 December verified that 700 units were on hand. Required (a) Prepare an income statement down to gross profit for December, using each of the following costing methods: i. specific identification, assuming that 400 units were sold from the beginning inventory, 400 units were sold from the first purchase, 200 units were sold from the 15 December purchase, and the remainder from the 23 December purchase. ii. FIFO iii. LIFO iv. weighted average. (b) Which cost flow method(s) resulted in the highest gross profit on sales? the highest ending inventory? Explain your results. (c) Prepare an income statement down to gross profit for December, using the FIFO and LIFO costing methods and assuming that the 23 December purchase had been delayed until January. (d) The management of Margaret’s Megamart Ltd expects the unit cost to increase to $3.90 excluding GST early in the next period. In anticipation of the price increase, a purchase of 600 additional units was made on 29 December at a unit cost of $3.65 excluding GST. Prepare an income statement down to gross profit for December, using the FIFO and LIFO costing methods. (e) Compare your results obtained in requirements A, C and D. Explain why your results are or are not the same. (LO2, LO4 and LO9) (a) (i) Specific Identification Cost of sales 400 units @ $3.00 $1 200 400 units @ $3.15 1 260 200 units @ $3.30 660 300 units @ $3.50 1 050 1 300 units $4 170 Ending inventory 300 units @ $3.00 $900 100 units @ $3.15 315 100 units @ $3.30 330 200 units @ $3.50 700 700 units $2 245 (ii) FIFO: Note: remove GST from purchase: •10/12 purchase ($1732.50 – GST $157.50 = $1575) •15/12 purchase ($1089.00 – GST $99.00 = $990) •23/12 purchase ($1925.00 – GST $175.00 = $1750) •Total Goods available for sale (excl GST) = ($2100 + 1575 + 990 + 1750 = $6415) Units Goods available (per question) 2 000 $6 415 Ending inventory (700 units): 500 units @ $3.50 (500) (1 750) 200 units @ $3.30 (200) (660) Cost of sales 1 300 $4 005 (iii) LIFO: Units Goods available 2 000 $6 415 Ending inventory (700 units): 700 units @ $3.00 (700) (2 100) Cost of sales 1 300 $4 315 (iv) Weighted average: Units Unit Cost Amount Beginning inventory 700 $3.00 $2 100 10/12 Purchase 500 $3.15 1 575 15/12 Purchase 300 $3.30 990 23/12 Purchase 500 $3.50 1 750 Goods available 2 000 $6 415 $6415 2000 = $3.21 per unit (rounded) Goods available 2 000 $3.21 $6 415 Ending inventory (700) $3.21 (2 247) Cost of sales (rounded) 1 300 $4 168 Note: remove GST from selling price: $6077.50 – GST $552.50 = $5525. Income Statement Spec. Ident. FIFO LIFO W’ted Av. Sales (excl GST) $5 525 $5 525 $5 525 $5 525 Beginning inventory 2 100 2 100 2 100 2 100 Purchases 4 315 4 315 4 315 4 315 Goods available for sale 6 415 6 415 6 415 6 415 Ending inventory 2 245 2 410 2 100 2 247 Cost of sales 4 170 4 005 4 315 4 168 Gross profit 1 355 1 520 1 210 1 357 (b) The highest gross profit was reported using FIFO. FIFO also reported the highest ending inventory balance since it is valued at the most recent higher prices. This is a result of the direct relationship between inventory values and profit. The higher the value placed on ending inventory, the higher the reported gross profit. (c) Income Statement FIFO LIFO Sales $5 525 $5 525 Beginning inventory 2 100 2 100 Purchases 2 565 2 565 Goods available for sale 4 665 4 665 Ending inventory (200 units) 660 600 Cost of sales 4 005 4 065 Gross profit $1 520 $1 460 (d) Income Statement FIFO LIFO Sales $5 525 $5 525 Beginning inventory 2 100 2 100 Purchases 6 505 6 505 Goods available for sale 8 605 8 605 Ending inventory (1300 units) *4 600 **4 005 Cost of sales 4 005 4 600 Gross profit $1 520 $925 * FIFO **LIFO 200 @ 3.30 = $ 660 700 @ 3.00 = $2 100 500 @ 3.50 = 1 750 500 @ 3.15 = 1 575 600 @ 3.65 = 2 190 100 @ 3.30 = 330 $4 600 $4 005 (e) FIFO reported the same cost of sales and gross profit in all cases. This is because the increases and decreases in ending inventory were offset by the same increases and decreases in purchases. LIFO reported three different cost of sales and gross profit results. This is shows that ending inventory and cost of sales valuations can be altered (manipulated) by recent purchases or non-purchases using LIFO assumptions. Problem 13.17 Specific identification — periodic inventory system Non-GST version Weston’s Washers Ltd buys and sells brand-name washing machines, which are identified by the manufacturer’s initials and model number. Ignore GST. The inventory on 1 July 2019 is as follows. Purchases and sales for July follow. Weston’s Washers Ltd uses the specific identification method to account for its inventory. All transactions were on credit and the unit cost of purchases and per-unit selling price for July were the same as given for the beginning inventory. Required (a) Prepare entries to record the 8 July purchase and the 20 July sale under the periodic inventory system method. Purchases and sales are subject to GST. (b) Calculate the cost of sales for July. (c) Calculate the cost of ending inventory on 31 July 2019. (d) Prepare an income statement for July based on the periodic inventory system. (LO2 and LO9) (a) General Journal July 8 Purchases $3 680 Accounts Payable $3 680 Purchased 4 units WES301 @ $880 on credit July 20 Accounts Receivable 1 800 Sales 1 800 Sold 2 units KEL633 @ $900 on credit (b) and (c) Beginning inventory Identification number Quantity Unit cost Total cost WES301 3 $880 $2 640 EMA4256 4 920 3 680 F&P111 4 800 3 200 KEL633 3 700 2 100 MAL720 5 600 3 000 Total $14 620 Purchases Identification number Quantity Unit cost Total cost WES301 4 $880 $3 520 EMA4256 6 920 5 520 KEL633 3 700 2 100 Total $11 140 Cost of sales Identification number Quantity Unit cost Total cost WES301 5 $880 $4 400 EMA4256 2 920 1 840 F&P111 1 800 800 KEL633 2 700 1 400 MAL720 3 600 1 800 Total $10 240 Ending inventory Identification number Quantity Unit cost Total cost WES301 2 $880 $1 760 EMA4256 8 920 7 360 F&P111 3 800 2 400 KEL633 4 700 2 800 MAL720 2 600 1 200 Total $15 520 Sales revenue Identification number Quantity Unit cost Total cost WES301 5 $1 150 $5 750 EMA4256 2 1 350 2 700 F&P111 1 1 199 1 199 KEL633 2 900 1 800 MAL720 3 800 2 400 Total $13 849 (d) WESTON’S WASHERS LTD Income Statement for the month ended 31 July 2018 INCOME: Sales $13 849 Cost of sales: Beginning inventory 14 620 Purchases 11 140 Goods available for sale 25 760 Less: Ending inventory 15 520 Cost of sales 10 240 GROSS PROFIT $3 609 Problem 13.17 Specific identification — periodic inventory system GST version Weston’s Washers Ltd buys and sells brand-name washing machines, which are identified by the manufacturer’s initials and model number. GST Inclusive The number of units on hand in inventory on 1 July 2019 is as follows. Identification number Quantity Unit Cost per unit Purchase cost per unit incl GST Selling price per unit incl GST WES301 3 $880 $968 $1265 EMA4256 4 920 1012 1485 F&P111 4 800 880 1318.90 KEL633 3 700 770 990 MAL720 5 600 660 800 Purchases and sales for July follow. July 1 5 8 9 11 15 20 23 Purchased 3 KEL633. Sold 2 EMA4256. Purchased 4 WES301. Sold 3 MAL720. Sold 1 F&P111. Purchased 6 EMA4256. Sold 2 KEL633. Sold 5 WES301. Weston’s Washers Ltd uses the specific identification method to account for its inventory. All transactions were on credit and the unit cost of purchases and per-unit selling price for July were the same as given in the table above. Required (a) Prepare entries to record the 8 July purchase and the 20 July sale under the periodic inventory system method. Purchases and sales are subject to GST. (b) Calculate the cost of sales for July. (c) Calculate the cost of ending inventory on 31 July 2019. (d) Prepare an income statement for July based on the periodic inventory system. (LO2 and LO9) (a) General journal July 8 Purchases $3 520 GST Receivable 352 Accounts Payable $3 872 Purchased 4 units WES301 @ $880 on credit + GST. July 20 Accounts Receivable 1 980 GST Payable 180 Sales 1 800 Sold 2 units KEL633 @ $900 on credit + GST. (b) and (c) Beginning inventory – note excludes GST Identification number Quantity Unit cost Total cost WES301 3 $880 $2 640 EMA4256 4 920 3 680 F&P111 4 800 3 200 KEL633 3 700 2 100 MAL720 5 600 3 000 Total $14 620 Purchases – note GST has been excluded from the purchase price Identification number Quantity Unit cost Total cost WES301 4 $880 $3 520 EMA4256 6 920 5 520 KEL633 3 700 2 100 Total $11 140 Cost of sales Identification number Quantity Unit cost Total cost WES301 5 $880 $4 400 EMA4256 2 920 1 840 F&P111 1 800 800 KEL633 2 700 1 400 MAL720 3 600 1 800 Total $10 240 Ending inventory Identification number Quantity Unit cost Total cost WES301 2 $880 $1 760 EMA4256 8 920 7 360 F&P111 3 800 2 400 KEL633 4 700 2 800 MAL720 2 600 1 200 Total $15 520 Sales revenue (excludes GST) Identification number Quantity Unit cost Total cost WES301 5 $1 150 $5 750 EMA4256 2 1 350 2 700 F&P111 1 1 199 1 199 KEL633 2 900 1 800 MAL720 3 800 2 400 Total $13 849 (d) WESTON’S WASHERS LTD Income Statement for the month ended 31 July 2018 INCOME: Sales $13 849 Cost of sales: Beginning inventory 14 620 Purchases 11 140 Goods available for sale 25 760 Less: Ending inventory 15 520 Cost of sales 10 240 GROSS PROFIT $3 609 Problem 13.18 Retail inventory method Non-GST version Redfern Retailers provided the following information for the month of June 2019. The entity uses the retail inventory method for interim reporting purposes. Normal mark-up on cost is 60%. Ignore GST. Required (a) Redfern Retailers requests that an estimate be made of inventory on hand at cost at 30 June 2019. Provide this estimate. (LO8) (a) Cost Retail Beginning inventory $8 000 $12 800 Net purchases 10 000 16 000 Goods available for sale $18 000 $28 800 Add: Additional mark-ups 260 Less: Mark downs (900) Mark-down cancellations 120 Staff discounts (500) $27 780 Sales 20 000 Ending inventory at retail 7 780 Cost ratio ($18 000/$27 780) 64.79% Ending inventory at cost $5 041 Problem 13.18 Retail inventory method GST version Redfern Retailers provided the following information for the month of June 2019. The entity uses the retail inventory method for interim reporting purposes. Normal mark-up on cost is 60%. Beginning inventory (cost) Net purchases (GST inclusive) Sales (GST inclusive) Mark-downs (some items still in stock) (GST inclusive) Mark-down cancellations (some items still in stock) (GST inclusive) Additional mark-ups (some items affected still in stock) (GST inclusive) Staff discounts (on items sold) (GST inclusive) $ 8 000 11 000 22 000 990 132 286 550 Required (a) Redfern Retailers requests that an estimate be made of inventory on hand at cost at 30 June 2019. Provide this estimate. (LO8) (a) Cost Retail excl GST Beginning inventory $8 000 $12 800 Net purchases 10 000 16 000 Goods available for sale $18 000 $28 800 Add: Additional mark-ups 260 Less: Mark downs (900) Mark-down cancellations 120 Staff discounts (500) $27 780 Sales 20 000 Ending inventory at retail 7 780 Cost ratio ($18 000/$27 780) 64.79% Ending inventory at cost $5 041 Problem 13.19 Gross profit method Non-GST version An explosion at Fenshaw’s Pharmaceuticals on the night of 15 May destroyed the entire inventory. The accounting records, which survived the explosion, contained the following account balances for the period 1 January to 15 May. The gross profit margin has averaged 42% over the last 3 years. Ignore GST. Required (a) Estimate the cost of the inventory that was destroyed, for insurance purposes. (LO8) (a) The estimated ending inventory can be disclosed by preparing an income statement and deducing the ending inventory by applying the profit (and hence cost) rates. FENSHAW’S PHARMACEUTICALS Income Statement for the period 1 January to 15 May INCOME Sales revenue $330 700 Less: Sales returns and allowances (4 200) Net sales revenue 326 500 100% Cost of sales: Beginning inventory 59 300 Purchases $285 000 Less: Purchases ret. & allow. (3 150) Add: Freight inwards 2 400 Net purchases 284 250 Goods available for sale 343 550 Less estimated ending inventory 154 180 Estimated cost of sales 189 370 58% Estimated gross profit $137 130 42% Problem 13.19 Gross profit method GST version An explosion at Fenshaw’s Pharmaceuticals on the night of 15 May destroyed the entire inventory. The accounting records, which survived the explosion, contained the following account balances for the period 1 January to 15 May. Sales Sales returns and allowances Purchases Purchases returns and allowances Freight inwards Inventory balance, 1 January $363 770 4 620 313 500 3 465 2 640 59 300 The gross profit margin has averaged 42% over the last 3 years. Transactions are GST inclusive. Required (a) Estimate the cost of the inventory that was destroyed, for insurance purposes. (LO8) (a) The estimated ending inventory can be disclosed by preparing an income statement and deducing the ending inventory by applying the profit (and hence cost) rates. Note, GST should be excluded from values. FENSHAW’S PHARMACEUTICALS Income Statement for the period 1 January to 15 May INCOME Sales revenue $330 700 Less: Sales returns and allowances (4 200) Net sales revenue 326 500 100% Cost of sales: Beginning inventory 59 300 Purchases $285 000 Less: Purchases ret. & allow. (3 150) Add: Freight inwards 2 400 Net purchases 284 250 Goods available for sale 343 550 Less estimated ending inventory 154 180 Estimated cost of sales 189 370 58% Estimated gross profit $137 130 42% Problem 13.20 Lower of cost and net realisable value Non-GST version The following information applies to the inventory of Carson’s Camera Store as at 30 June 2019. Required (a) Calculate the ending inventory value as at 30 June 2019, applying the lower of cost and net realisable value rule to: i. individual inventory items ii. major categories of cameras and video equipment iii. total inventory. (b) What effect does application of the lower of cost and net realisable rule have on the financial statements of the business? (c) Assume that at the end of the next financial year, 12 units of model A-4 are still on hand and the net realisable value is $80 per unit. How would this increase in net realisable value affect the inventory value of the 12 units. (d) How would the increase in net realisable value in requirement C be treated in the accounting records? (LO5) (a) Item Quantity Cost NRV Cost NRV LC & NRV (by item) Cameras Model A-4 18 $95 $75 $1 710 $1 350 $1 350 Model C-7 12 100 120 1 200 1 440 1 200 Model G-1 20 65 60 1 300 1 200 1 200 Model Z-8 6 50 55 300 330 300 Total – Cameras $4 510 $4 320 $4 050 Video equipment Model BD-5 15 180 190 $2 700 $2 850 $2 700 Model FY-9 10 240 220 2 400 2 200 2 200 Total – Video equipment $5 100 $5 050 $4 900 Total $9 610 $9 370 $8 950 i. As shown in the above schedule, applying the lower cost and net realisable value rule to each item of the inventory results in ending inventory of $8950. ii. Applying the lower of cost and net realisable value rule to each major category of the inventory results in an ending inventory amount of $9370 calculated as follows: Cameras $4 320 Video equipment 5 050 $9 370 iii. As shown in the above schedule, applying the lower of cost and net realisable value rule to the total inventory results in an ending inventory of $9370. (b) The LC & NRV procedure that results in the lowest ending inventory amount at 30 June 2019 will also result in the lowest profit for the year (the lower the ending amount, the higher will be the cost of sales). Applying the lower of cost and net realisable value rule to each item of the inventory will result in the lowest profit for the year. This is the method favoured by IAS 2/AASB 102. (c) If the 12 units of Camera A-4 were still on hand at the end of the financial year at a net realisable value of $80 per unit, there would be a change to the inventory valuation. The inventory would now be valued at $80 per unit (instead of $75 per unit) being an adjustment back to inventory at the end of the year for 12 $5.00 = $60 increase in ending inventory. (d) The increase in the net realisable value would be recorded in the accounting records by debiting inventory for $60 and crediting gain on adjustment of inventory for $60. Problem 13.20 Lower of cost and net realisable value GST version The following information applies to the inventory of Carson’s Camera Store as at 30 June 2019. Unit price (including GST) Model number Quantity Actual cost Net realisable value Cameras: A-4 C-7 G-1 Z-8 Video equipment: BD-5 FY-9 18 12 20 6 15 10 $104.50 110.00 71.50 55.00 198.00 264.00 $ 82.50 132.00 66.00 60.50 209.00 242.00 Required (a) Calculate the ending inventory value as at 30 June 2019, applying the lower of cost and net realisable value rule to: i. individual inventory items ii. major categories of cameras and video equipment iii. total inventory. (b) What effect does application of the lower of cost and net realisable rule have on the financial statements of the business? (c) Assume that at the end of the next financial year, 12 units of model A-4 are still on hand and the net realisable value is $80 per unit. How would this increase in net realisable value affect the inventory value of the 12 units. (d) How would the increase in net realisable value in requirement C be treated in the accounting records? (LO5) Note: prices are GST Inclusive, it is necessary to remove the GST component from all prices prior to applying the lower of cost and net realisable value. Unit price (excluding GST) Model number Quantity Actual cost Net realisable value Cameras: A-4 C-7 G-1 Z-8 Video equipment: BD-5 FY-9 18 12 20 6 15 10 $ 95 100 65 50 180 240 $ 75 120 60 55 190 220 (a) Item Quantity Cost NRV Cost NRV LC & NRV (by item) Cameras Model A-4 18 $95 $75 $1 710 $1 350 $1 350 Model C-7 12 100 120 1 200 1 440 1 200 Model G-1 20 65 60 1 300 1 200 1 200 Model Z-8 6 50 55 300 330 300 Total – Cameras $4 510 $4 320 $4 050 Video equipment Model BD-5 15 180 190 $2 700 $2 850 $2 700 Model FY-9 10 240 220 2 400 2 200 2 200 Total – Video equipment $5 100 $5 050 $4 900 Total $9 610 $9 370 $8 950 i. As shown in the above schedule, applying the lower cost and net realisable value rule to each item of the inventory results in ending inventory of $8950. ii. Applying the lower of cost and net realisable value rule to each major category of the inventory results in an ending inventory amount of $9370 calculated as follows: Cameras $4 320 Video equipment 5 050 $9 370 iii. As shown in the above schedule, applying the lower of cost and net realisable value rule to the total inventory results in an ending inventory of $9370. (b) The LC & NRV procedure that results in the lowest ending inventory amount at 30 June 2019 will also result in the lowest profit for the year (the lower the ending amount, the higher will be the cost of sales). Applying the lower of cost and net realisable value rule to each item of the inventory will result in the lowest profit for the year. This is the method favoured by IAS 2/AASB 102. (c) If the 12 units of Camera A-4 were still on hand at the end of the financial year at a net realisable value of $80 per unit, there would be a change to the inventory valuation. The inventory would now be valued at $80 per unit (instead of $75 per unit) being an adjustment back to inventory at the end of the year for 12 $5.00 = $60 increase in ending inventory. (d) The increase in the net realisable value would be recorded in the accounting records by debiting inventory for $60 and crediting gain on adjustment of inventory for $60. Problem 13.21 Lower of cost and net realisable value Non-GST version The information below relates to barrels of oil held in the inventory of Olsen’s Ltd during 2019. Owing to an oil glut, the net realisable value for a barrel of the same grade of oil was $40 per barrel on 31 December 2019. In 2020, the company disposed of the 15 000 barrels of oil in the ending inventory for $600 000. No additional purchases were made in 2020. Olsen’s Ltd uses a periodic inventory system and the average cost flow method. Ignore GST. Required (a) Complete the following partial income statements for 2019 and 2020 under the average cost flow method and the lower of cost and net realisable value rule. (LO3, LO4 and LO5) (a) OLSEN’S LTD Income Statements for the years 2019 and 2020 Average cost LC & NRV 2019 2020 2019 2020 INCOME: Sales $4 680 000 $600 000 $4 680 000 $600 000 Cost of sales: Beginning inventory 1 320 000 660 000 1 320 000 600 000 Purchases 3 300 000 — 3 300 000 — Cost of goods available for sale 4 620 000 660 000 4 620 000 600 000 Less: Ending inventory 660 000 — 600 000 — Cost of sales 3 960 000 660 000 4 020 000 600 000 GROSS PROFIT $720 000 $(60 000) $660 000 $nil Problem 13.21 Lower of cost and net realisable value GST version The information below relates to barrels of oil held in the inventory of Olsen’s Ltd during 2019. Barrels Unit cost 1 January 15 April 13 May 9 August 28 October Beginning inventory Purchases (GST inclusive) Sales ($57.20 per barrel GST inclusive) Purchases (GST inclusive) Sales ($57.20 per barrel GST inclusive) 30 000 40 000 (50 000) 35 000 (40 000) $44.00 48.40 48.40 Owing to an oil glut, the net realisable value for a barrel of the same grade of oil was $40 per barrel (excluding GST) on 31 December 2019. In 2020, the company disposed of the 15 000 barrels of oil in the ending inventory for $660 000 (GST inclusive). No additional purchases were made in 2020. Olsen’s Ltd uses a periodic inventory system and the average cost flow method. Required (a) Complete the following partial income statements for 2019 and 2020 under the average cost flow method and the lower of cost and net realisable value rule. (LO3, LO4 and LO5) (a) OLSEN’S LTD Income Statements for the years 2019 and 2020 Average cost LC & NRV 2019 2020 2019 2020 INCOME: Sales $4 680 000 $600 000 $4 680 000 $600 000 Cost of sales: Beginning inventory 1 320 000 660 000 1 320 000 600 000 Purchases 3 300 000 — 3 300 000 — Cost of goods available for sale 4 620 000 660 000 4 620 000 600 000 Less: Ending inventory 660 000 — 600 000 — Cost of sales 3 960 000 660 000 4 020 000 600 000 GROSS PROFIT $720 000 $(60 000) $660 000 $nil Problem 13.22 FIFO method — perpetual inventory system Non-GST version Tamworth Trading Ltd is a company operating in the retail sector. The beginning inventory of Product EF5089 and information about purchases and sales made during June are shown below. Tamworth Trading Ltd uses the perpetual inventory system, and all purchases and sales are on credit. Selling price is $5 per unit. GST is 10% and is not included in any of the costs and selling prices above. A stocktake on 30 June revealed 5150 units in inventory. Ignore GST. Required (a) Using the FIFO method, prepare appropriate purchases and sales journals to record these events. (b) Prepare an appropriate inventory record for Product EF5089 for June, and post the journals prepared in requirement A above to the appropriate general ledger accounts (assuming that product EF5089 is the only product bought and sold by Tamworth Trading Ltd). (c) Prepare an income statement for Tamworth Trading Ltd for June. (LO3 and LO9) (a) and (b) Product FIFO Method Purchases Sales Balance Date Explanation Unit Unit Cost Total Cost Unit Unit Cost Total Cost Unit Unit Cost Total Cost 1/6 Balance 6100 $2.20 $13 420 4/6 Purchases 4600 $2.25 $10 350 6100 $2.20 4600 $2.25 23 770 9/6 Sales 4100 $2.20 $9 020 2000 $2.20 4 600 $2.25 14 750 12/6 Purchases 4100 $2.40 $9 840 2000 $2.20 4600 $2.25 4100 $2.40 24 590 21/6 Sales 2000 $2.20 4 400 3500 $2.25 1100 $2.25 2 475 4100 $2.40 17 715 24/6 Sales 2900 $2.25 6 525 600 $2.25 4100 $2.40 11 190 26/6 Purchases 3100 $2.50 7 750 600 $2.25 4100 $2.40 3100 $2.50 18 940 30/6 Sales 600 $2.25 1 350 2100 $2.40 30/6 Missing Inventory 2000 50 $2.40 $2.40 4 800 120 3100 2050 3100 $2.50 $2.40 $2.50 12 790 $12670 $28 690 Sales Journal Date Account Post Ref Sales Accounts Receivable Cost of sales 9/6 (4100 units @ $5) $20 500 $20 500 $9 020 21/6 (3100 units @ $5) 15 500 15 500 6 875 24/6 (2900 units @ $5) 14 500 14 500 6 525 30/6 (2600 units @ $5) 13 000 13 000 6 150 $63 500 $69 850 28 570 (400) (500) Purchases Journal Date Account Post Ref Inventory 4/6 (4600 units @ $2.25) $10 350 12/6 (4100 units @ $2.40) 9 840 26/6 (3100 units @ $2.50) 7 750 $27 940 (500) General Journal 30/6 Dr Inventory loss $120 Cr Inventory $120 Stocktake revealed that 50 units are missing GENERAL LEDGER Sales No. 400 Date Explanation Post Ref. Debit Credit Balance June 30 Balance SJ $63 500 $63 500 Inventory No. 500 Date Explanation Post Ref. Debit Credit Balance June 1 Balance $13 420 30 Purchases PJ $27 940 41 360 30 30 Cost of sales Missing inventory SJ GJ 28 570 120 12 790 12670 (c) TAMWORTH TRADING LTD Income Statement for the month ended 30 June INCOME Sales $63 500 Less: Sales returns and allowances — Net sales 63 500 Less: Cost of sales Less: Inventory loss 28 570 120 GROSS PROFIT 34 810 LESS: EXPENSES — PROFIT $34 810 Problem 13.22 FIFO method — perpetual inventory system GST version Tamworth Trading Ltd is a company operating in the retail sector. The beginning inventory of Product EF5089 and information about purchases and sales made during June are shown below. June 1 4 9 12 21 24 26 30 Inventory Purchases Sales Purchases Sales Sales Purchases Sales 6 100 4 600 4 100 4 100 3 100 2 900 3 100 2 600 units units units units units units units units @ @ @ @ $2.20 2.25 2.40 2.50 Tamworth Trading Ltd uses the perpetual inventory system, and all purchases and sales are on credit. Selling price is $5 per unit. GST is 10% and is not included in any of the costs and selling prices above. A stocktake on 30 June revealed 5150 units in inventory. Required (a) Using the FIFO method, prepare appropriate purchases and sales journals to record these events. (b) Prepare an appropriate inventory record for Product EF5089 for June, and post the journals prepared in requirement A above to the appropriate general ledger accounts (assuming that product EF5089 is the only product bought and sold by Tamworth Trading Ltd). (c) Prepare an income statement for Tamworth Trading Ltd for June. (LO3 and LO9) (a) and (b) Product FIFO Method Purchases Sales Balance Date Explanation Unit Unit Cost Total Cost Unit Unit Cost Total Cost Unit Unit Cost Total Cost 1/6 Balance 6100 $2.20 $13 420 4/6 Purchases 4600 $2.25 $10 350 6100 $2.20 4600 $2.25 23 770 9/6 Sales 4100 $2.20 $9 020 2000 $2.20 4 600 $2.25 14 750 12/6 Purchases 4100 $2.40 $9 840 2000 $2.20 4600 $2.25 4100 $2.40 24 590 21/6 Sales 2000 $2.20 4 400 3500 $2.25 1100 $2.25 2 475 4100 $2.40 17 715 24/6 Sales 2900 $2.25 6 525 600 $2.25 4100 $2.40 11 190 26/6 Purchases 3100 $2.50 7 750 600 $2.25 4100 $2.40 3100 $2.50 18 940 30/6 Sales 600 $2.25 1 350 2100 $2.40 30/6 Missing Inventory 2000 50 $2.40 $2.40 4 800 120 3100 2050 3100 $2.50 $2.40 $2.50 12 790 $12670 $28 690 Sales Journal Date Account Post Ref Sales GST payable Receivable Cost of sales 9/6 (4100 units @ $5) $20 500 $2 050 $22 550 $9 020 21/6 (3100 units @ $5) 15 500 1 550 17 050 6 875 24/6 (2900 units @ $5) 14 500 1 450 15 950 6 525 30/6 (2600 units @ $5) 13 000 1 300 14 300 6 150 $63 500 $6 350 $69 850 28 570 (400) (500) Purchases Journal Date Account Post Ref Inventory GST receivable Payable 4/6 (4600 units @ $2.25) $10 350 $1 035 $11 385 12/6 (4100 units @ $2.40) 9 840 984 10 824 26/6 (3100 units @ $2.50) 7 750 775 8 525 $27 940 $2 794 $30 734 (500) General Journal 30/6 Dr Inventory loss $120 Cr Inventory $120 Stocktake revealed that 50 units are missing GENERAL LEDGER Sales No. 400 Date Explanation Post Ref. Debit Credit Balance June 30 Balance SJ $63 500 $63 500 Inventory No. 500 Date Explanation Post Ref. Debit Credit Balance June 1 Balance $13 420 30 Purchases PJ $27 940 41 360 30 30 Cost of sales Missing inventory SJ GJ 28 570 120 12 790 12670 (c) TAMWORTH TRADING LTD Income Statement for the month ended 30 June INCOME Sales $63 500 Less: Sales returns and allowances — Net sales 63 500 Less: Cost of sales Less: Inventory loss 28 570 120 GROSS PROFIT 34 810 LESS: EXPENSES — PROFIT $34 810 Problem 13.23 Cost of sales — FIFO and moving average Non-GST version The following information has been extracted from the records of Steven’s Stationery about one of its popular products. Steven’s Stationery uses the perpetual inventory system. Its annual reporting date is 31 December. Ignore GST. Required (a) Calculate the cost of inventory on hand at 31 December 2019 and the cost of sales for the year ended 31 December 2019, assuming: i. the FIFO cost flow assumption ii. the moving average cost flow assumption (round average unit costs to the nearest cent, and total cost amounts to the nearest dollar). (b) Prepare the income statement to gross profit for the year ended 31 December 2019, assuming: i. the FIFO cost flow assumption ii. the moving average cost flow assumption (LO3 and LO9) (a) FIFO Cost assumption: perpetual. Product FIFO Method Purchases Sales Balance Date Explanation Unit Unit cost Total cost Unit Unit cost Total cost Unit Unit cost Total cost 1/1 Balance 900 $7.00 $6 300 6/1 Purchases 400 $7.05 $2 820 900 $7.00 400 $7.05 9 120 5/2 Sales 900 $7.00 $6 300 100 $ 7.05 705 300 $7.05 2 115 17/3 Purchases 1100 7.35 8 085 300 $7.05 1100 $7.35 10 200 24/4 Purchases returns (80) 7.35 (588) 300 $7.05 1020 $7.35 9 612 4/5 Sales 300 $7.05 2 115 400 $7.35 2 940 620 $7.35 4 557 26/6 Purchases 8400 7 50 63 000 620 $7.35 8400 $7.50 67 557 11/8 Sales 620 $7.35 4 557 1180 $7 50 8 850 7220 $7.50 54 150 19/8 Sales returns (20) $7.50 (150) 7240 $7 50 54 300 11/9 Sales 3500 $7.50 26 250 3740 $7.50 28 050 6/10 Purchases 500 8.00 4 000 3740 $7.50 500 8.00 32 250 11/12 Sales 3100 7.50 23 250 640 7.50 500 8 00 8 800 $74 817 Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit cost Total cost Units Unit cost Total cost Units Unit cost Total cost 1/1 Beg. invent. 900 $7.00 $6 300 6/1 Purchases 400 $7.05 $2 820 1300 $7.02 9 120 5/2 Sales 1000 $7.02 $7020 300 $7.02 2 100 17/3 Purchases 1100 $7.35 8 085 1400 $7.28 10 185 24/4 Purchases return (80) $7.35 (588) 1320 $7.27 9 597 4/5 Sales 700 $7.27 5 089 620 $7.27 4 508 26/6 Purchases 8400 7.50 63 000 9 020 $7.48 67 508 11/8 Sales 1800 $7.48 13 472 7 220 $7.48 54 036 19/8 Sales return (20) $7.48 (150) 7 240 $7.48 54 186 11/9 Sales 3 500 $7.48 26 195 3 740 $7.48 27 991 6/10 Purchases 500 8.00 4 000 4 240 $7 55 31 991 11/12 Sales 3 100 $7.55 23 390 1 140 $7.55 8 601 $75 016 (b) FIFO STEVEN’S STATIONERY Income Statement for the year ended 31 December 2019 INCOME Sales* $137 820 Less: Sales returns and allowances (265) Net sales 137 555 Less: Cost of sales 74 817 GROSS PROFIT $62 738 Sales = (1000 $12) + (700 $12.10) + (1800 $13.25) + (3500 $13.50) + (3100 $15) = $137 820 Moving average: STEVEN’S STATIONERY Income Statement for the year ended 31 December 2019 INCOME Sales* $137 820 Less: Sales returns and allowances (265) Net sales 137 555 Less: Cost of sales 75 016 GROSS PROFIT $62 539 Problem 13.23 Cost of sales — FIFO and moving average GST version The following information has been extracted from the records of Steven’s Stationery about one of its popular products. Steven’s Stationery uses the perpetual inventory system. Its annual reporting date is 31 December. All costs and selling prices are GST inclusive. Round to 2 decimal places. No. of units Unit cost 2019 Jan. 1 6 Feb. 5 Mar. 17 Beginning balance Purchases (GST inclusive) Sales @ $13.20 per unit (GST inclusive) Purchases (GST inclusive) 900 400 1 000 1 100 $7.00 7.76 8.09 Apr. 24 May 4 Jun. 26 Aug. 11 Aug. 19 Sept. 11 Oct. 6 Dec. 11 Purchases returns Sales @ $13.30 per unit (GST inclusive) Purchases (GST inclusive) Sales @ $14.60 per unit (GST Inclusive) Sales returns @ $14.60 per unit (GST inclusive) Sales @ $14.85 per unit (GST inclusive) Purchases (GST inclusive) Sales @ $16.50 per unit 80 700 8 400 1 800 20 3 500 500 3 100 8.09 8.25 8.80 Required (a) Calculate the cost of inventory on hand at 31 December 2019 and the cost of sales for the year ended 31 December 2019, assuming: i. the FIFO cost flow assumption ii. the moving average cost flow assumption (round average unit costs to the nearest cent, and total cost amounts to the nearest dollar). (b) Prepare the income statement to gross profit for the year ended 31 December 2019, assuming: i. the FIFO cost flow assumption ii. the moving average cost flow assumption. (LO3 and LO9) Notes: to convert purchases and sales to exclude GST. • Jan 6 purchase $7.76 - GST $0.71 = cost $7.05 • Mar 17 purchase $8.09 - GST 0.74 = cost $7.35 • Apr 24 purchase return $8.09 - GST 0.74 = cost $7.35 • Jun 26 purchase $8.25 - GST $0.75 = cost $7.50 • Oct 6 purchase $8.80 - GST $0.80 = cost $8.00 • Feb 5 Sales $13.20 - GST $1.20 = sale $12.00 • May 4 Sales $13.30 - GST $1.21 = sale $12.09 • Aug 11 Sales $14.60 - GST $1.33 = sale $13.27 • Aug 19 sales return $14.60 - GST $1.33 = sale $13.27 • Sept 11 Sales $14.85 - GST $1.35 = sale $13.50 • Dec 11 Sales $16.50 - GST $1.50 = sale $15.00 (a) FIFO Cost assumption: perpetual. Product FIFO Method Purchases Sales Balance Date Explanation Unit Unit cost Total cost Unit Unit cost Total cost Unit Unit cost Total cost 1/1 Balance 900 $7.00 $6 300 6/1 Purchases 400 $7.05 $2 820 900 $7.00 400 $7.05 9 120 5/2 Sales 900 $7.00 $6 300 100 $ 7.05 705 300 $7.05 2 115 17/3 Purchases 1100 7.35 8 085 300 $7.05 1100 $7.35 10 200 24/4 Purchases returns (80) 7.35 (588) 300 $7.05 1020 $7.35 9 612 4/5 Sales 300 $7.05 2 115 400 $7.35 2 940 620 $7.35 4 557 26/6 Purchases 8400 7 50 63 000 620 $7.35 8400 $7.50 67 557 11/8 Sales 620 $7.35 4 557 1180 $7 50 8 850 7220 $7.50 54 150 19/8 Sales returns (20) $7.50 (150) 7240 $7 50 54 300 11/9 Sales 3500 $7.50 26 250 3740 $7.50 28 050 6/10 Purchases 500 8.00 4 000 3740 $7.50 500 8.00 32 250 11/12 Sales 3100 7.50 23 250 640 7.50 500 8 00 8 800 $74 817 Moving average method: Perpetual. Purchases Sales Balance Date Explanation Units Unit cost Total cost Units Unit cost Total cost Units Unit cost Total cost 1/1 Beg. invent. 900 $7.00 $6 300 6/1 Purchases 400 $7.05 $2 820 1300 $7.02 9 120 5/2 Sales 1000 $7.02 $7020 300 $7.02 2 100 17/3 Purchases 1100 $7.35 8 085 1400 $7.28 10 185 24/4 Purchases return (80) $7.35 (588) 1320 $7.27 9 597 4/5 Sales 700 $7.27 5 089 620 $7.27 4 508 26/6 Purchases 8400 7.50 63 000 9 020 $7.48 67 508 11/8 Sales 1800 $7.48 13 472 7 220 $7.48 54 036 19/8 Sales return (20) $7.48 (150) 7 240 $7.48 54 186 11/9 Sales 3 500 $7.48 26 195 3 740 $7.48 27 991 6/10 Purchases 500 8.00 4 000 4 240 $7 55 31 991 11/12 Sales 3 100 $7.55 23 390 1 140 $7.55 8 601 $75 016 (b) FIFO STEVEN’S STATIONERY Income Statement for the year ended 31 December 2019 INCOME Sales* $138 099 Less: Sales returns and allowances** (265) Net sales 137 834 Less: Cost of sales 74 817 GROSS PROFIT $63 017 *Sales = (1000 $12) + (700 $12.09) + (1800 $13.27) + (3500 $13.50) + (3100 $15) = $138 099 Sales returns = (20 x $13.27) = $265.40 or $265 Moving average: STEVEN’S STATIONERY Income Statement for the year ended 31 December 2019 INCOME Sales* $138 099 Less: Sales returns and allowances** (265) Net sales 137 834 Less: Cost of sales 75 016 GROSS PROFIT $62 818 Problem 13.24 Cost of sales — periodic inventory system Non-GST version The following information relates to the inventory of Harry’s Hardware during the month of December. Harry’s Hardware uses the periodic inventory system. During the month, 700 units were sold for $6300. A physical stocktake on 31 December verified that 590 units were on hand. Ignore GST. Required (a) Prepare an income statement up to gross profit for December using each of the following costing methods: i. specific identification, assuming that 300 units were sold from the beginning inventory and 400 units were sold from the first purchase ii. FIFO iii. LIFO iv. weighted average. (a) Which cost flow method resulted in the highest gross profit on sales? the highest ending inventory? Explain why your results differ. (b) Prepare an income statement to gross profit for December using the FIFO and LIFO costing methods and assuming the 23 December purchase had not been made. (c) Management of Harry’s Hardware is expecting the unit cost to increase to $6.00 early in the next period. In anticipation of the price increase, a purchase of 600 additional units was made on 29 December at a unit cost of $5.80. Prepare an income statement to gross profit for December using the FIFO and LIFO costing methods. (d) Compare your results obtained in requirements A, C and D. Explain why your results are or are not the same. (LO2 and LO4) (a) HARRY’S HARDWARE Income Statements for the month ended 31 December Specific Weighted identification FIFO LIFO Average Sales revenue $6 300 $6 300 $6 300 $6 300 Cost of sales: Beginning inventory 2 500 2 500 2 500 2 500 Purchases 6 010 6 010 6 010 6 010 Goods available for sale 8 510 8 510 8 510 8 510 Less: Ending inventory 3 154 3 304 2 977 3 139 Cost of sales 5 356 5 206 5 533 5 371 GROSS PROFIT $944 $1 094 $ 767 $929 Specific identification: LIFO: 200 $5.00 = $1 000 500 $5.00 = $2 500 100 $5.30 530 90 $5.30 = 477 290 $5.60 = 1 624 $2 977 $3 154 FIFO: Weighted average: 590 $5.60 = $3 304 $8510 ÷ 1600 = $5.32 $3 304 $5.32 590 = $3 139 (b) FIFO produced the highest gross profit. Specific identification produced the highest ending inventory value. When unit costs change, the cost of sales and ending inventory amounts will vary depending on the cost flow method used. In other words, the four cost flow methods are based on different assumptions as to which unit cost is to be included in cost of sales. (c) and (d) Assume for part (c). that the ending inventory physical count was 90 units rather than 590 units. Assume for part (d). that the ending inventory physical count was 1190 units rather than 590 units. HARRY’S HARDWARE Income Statements for the month ended 31 December C. D. FIFO LIFO FIFO LIFO INCOME: Sales $6 300 $6 300 $6 300 $6 300 Cost of sales: Beginning inventory 2 500 2 500 2 500 2 500 Purchases 2 650 2 650 9 490 9 490 Goods available for sale 5 150 5 150 11 990 11 990 Less: ending inventory 477 450 6 784 6 214 Cost of sales 4 673 4 700 5206 5 776 GROSS PROFIT $1 627 $1 600 $1 094 $524 Ending Inventory Requirement (c) Requirement (d) FIFO: 90 $5.30 = $477 600 $5.80 = $3 480 590 5.60 = 3304 = $6 784 LIFO: 90 $5.00 = $450 500 $5.00 = $2 500 500 5.30 = 2 650 190 5.60 = 1 064 $6 214 Purchases (Requirement (d)) 10/12 2 650 23/12 3 360 29/12 600 $5.80 = 3 480 9 490 (e) The FIFO results are the same for A and D because it is assumed that the first units purchased are the first ones sold. The answer to C is different due to the change in purchases and ending stock. On the other hand, LIFO results are affected by purchases made or not made at the end of the period because the last units purchased are assumed to be the first units sold. Problem 13.24 Cost of sales — periodic inventory system GST version The following information relates to the inventory of Harry’s Hardware during the month of December. GST is 10% and is not included in any of the costs prices above. Harry’s Hardware uses the periodic inventory system. During the month, 700 units were sold for $6930 (GST inclusive). A physical stocktake on 31 December verified that 590 units were on hand. Required (a) Prepare an income statement up to gross profit for December using each of the following costing methods: i. specific identification, assuming that 300 units were sold from the beginning inventory and 400 units were sold from the first purchase ii. FIFO iii. LIFO iv. weighted average. (b) Which cost flow method resulted in the highest gross profit on sales? the highest ending inventory? Explain why your results differ. (c) Prepare an income statement to gross profit for December using the FIFO and LIFO costing methods and assuming the 23 December purchase had not been made. (d) Management of Harry’s Hardware is expecting the unit cost to increase to $6.00 early in the next period. In anticipation of the price increase, a purchase of 600 additional units was made on 29 December at a unit cost of $5.80. Prepare an income statement to gross profit for December using the FIFO and LIFO costing methods. (e) Compare your results obtained in requirements A, C and D. Explain why your results are or are not the same. (LO2 and LO4) Note: it is necessary to exclude GST from all selling and cost prices. (a) HARRY’S HARDWARE Income Statements for the month ended 31 December Specific Weighted identification FIFO LIFO Average Sales revenue $6 300 $6 300 $6 300 $6 300 Cost of sales: Beginning inventory 2 500 2 500 2 500 2 500 Purchases 6 010 6 010 6 010 6 010 Goods available for sale 8 510 8 510 8 510 8 510 Less: Ending inventory 3 154 3 304 2 977 3 139 Cost of sales 5 356 5 206 5 533 5 371 GROSS PROFIT $944 $1 094 $ 767 $929 Specific identification: LIFO: 200 $5.00 = $1 000 500 $5.00 = $2 500 100 $5.30 530 90 $5.30 = 477 290 $5.60 = 1 624 $2 977 $3 154 FIFO: Weighted average: 590 $5.60 = $3 304 $8510 ÷ 1600 = $5.32 $3 304 $5.32 590 = $3 139 (b) FIFO produced the highest gross profit. Specific identification produced the highest ending inventory value. When unit costs change, the cost of sales and ending inventory amounts will vary depending on the cost flow method used. In other words, the four cost flow methods are based on different assumptions as to which unit cost is to be included in cost of sales. (c) and (d) Assume for part (c) that the ending inventory physical count was 90 units rather than 590 units. Assume for part (d) that the ending inventory physical count was 1190 units rather than 590 units. HARRY’S HARDWARE Income Statements for the month ended 31 December C. D. FIFO LIFO FIFO LIFO INCOME: Sales $6 300 $6 300 $6 300 $6 300 Cost of sales: Beginning inventory 2 500 2 500 2 500 2 500 Purchases 2 650 2 650 9 490 9 490 Goods available for sale 5 150 5 150 11 990 11 990 Less: ending inventory 477 450 6 784 6 214 Cost of sales 4 673 4 700 5206 5 776 GROSS PROFIT $1 627 $1 600 $1 094 $524 Ending Inventory Requirement C. Requirement D. FIFO: 90 $5.30 = $477 600 $5.80 = $3 480 590 5.60 = 3304 $6 784 LIFO: 90 $5.00 = $450 500 $5.00 = $2 500 500 5.30 = 2 650 190 5.60 = 1 064 $6 214 Purchases (Requirement D) 10/12 2 650 23/12 3 360 29/12 600 $5.80 = 3 480 9 490 (e) The FIFO results are the same for A and D because it is assumed that the first units purchased are the first ones sold. The answer to C is different due to the change in purchases and ending stock. On the other hand, LIFO results are affected by purchases made or not made at the end of the period because the last units purchased are assumed to be the first units sold. Problem 13.25 Correction of inventory errors Non-GST version Thomas Turnbull, who operates a business as a toy retailer, was concerned about the end-of-year physical stocktake and ‘cut-off’ procedures. The Inventory Control account balance at 30 June 2019, under the perpetual inventory system, was $77 200. The physical stocktake count, however, revealed the cost of inventory on hand at 30 June 2019 to be only $73 400. Although Thomas expected some inventory shortfall because of breakage and petty theft, he considered this shortfall to be excessive. Net realisable value for each inventory item held for sale exceeds cost. In investigating the reason for the inventory ‘shortfall’, Thomas discovered the following. 1. Goods costing $800 were sold on credit to A. Anderson for $1500 on 26 June 2019 on DDP terms. The goods were still in transit at 30 June 2019. Thomas had recorded the sale on 26 June 2019 and did not include these goods in the physical stocktake. 2. Thomas included $2200 of goods held on consignment in the physical stocktake. 3. Goods costing $910 were purchased on credit from Toy Train Trader on 26 June 2019 and received on 28 June 2019. The purchase was unrecorded at 30 June 2019, but the goods were included in the physical stocktake. 4. Goods costing $400 were purchased on credit from Toy Town Supplies on 23 June 2019 on EXW shipping terms. The goods were delivered to the transport company on 27 June 2018. The purchase was recorded on 27 June 2019 but, as the goods had not yet arrived, Thomas did not include these goods in the physical stocktake. 5. At 30 June 2019, Thomas had unsold goods costing $3700 out on consignment. These goods were not included in the physical stocktake. 6. Goods costing $2100 were sold on credit to Kids Corner Playcentre for $3800 on 24 June 2019 on EXW shipping terms. The goods were shipped on 28 June 2019. The sale was unrecorded at 30 June 2019 and Thomas did not include these goods in the physical stocktake. Required (a) Prepare any journal entries necessary on 30 June 2019 to correct any errors and to adjust inventory. Ignore GST. (LO7) (a) (i) As the goods were still in transit under the terms DPP, the seller is responsible for the freight and the seller is still the legal owner until the goods reach their destination. As Thomas had incorrectly recorded a sale, the Inventory account should be $800 larger (= $78 000) and so too should the stocktake figure ($74 200). Assuming GST, the journal entries required to correct the error are: General Journal 2019 June 30 Sales 1 500 Accounts Receivable – A. Anderson $1 500 To correct error in recording sales. June 30 Inventory 800 Cost of Sales 800 To correct error in cost of sales and inventory. (ii) Goods held on consignment should not have been included in the stocktake. Hence, after correcting for this error, the physical count for inventory should be ($74 200 – $2200) = $72 000. (iii) As the goods have been received and included already in the stocktake, the item should have been recorded as a purchase: General Journal June 30 Inventory 910 Accounts Payable – Toy Train Trader 910 Purchases recorded This has the impact of increasing the Inventory account by a further $910 to a total of $78 910 (so far). The physical stocktake figure does not change as the inventory has already been included. (iv) The impact of this error is that the goods should have been included in the physical stocktake even though not yet received. Hence the physical stocktake figure should increase by $400 to $72 400. No correcting entry is necessary. (v) These goods on consignment legally belong to Thomas and therefore should be included in the physical stocktake, thus making the amount of the physical count increase by $3 700 to $76 100. (vi) As the shipping terms are EXW and the goods have been shipped, the buyer now legally owns the goods and Thomas should have recorded a sale as follows. General Journal 2018 June 30 Accounts Receivable – Kids Corner Playcentre 3 800 Sales 3 800 To record sales. June 30 Cost of Sales 2 100 Inventory 2 100 To record cost of sales and inventory. The impact of this entry is to reduce recorded inventory by $2100 down from $78 910 to $76 810. After all errors are corrected the Inventory account should be $76 810, and the physical count should be $76 100. Hence, the loss of inventory through petty theft and breakages is only $710 and is not as bad as Thomas first thought. Problem 13.25 Correction of inventory errors GST version Thomas Turnbull, who operates a business as a toy retailer, was concerned about the end-of-year physical stocktake and ‘cut-off’ procedures. The Inventory Control account balance at 30 June 2019, under the perpetual inventory system, was $77 200. The physical stocktake count, however, revealed the cost of inventory on hand at 30 June 2019 to be only $73 400. Although Thomas expected some inventory shortfall because of breakage and petty theft, he considered this shortfall to be excessive. Net realisable value for each inventory item held for sale exceeds cost. In investigating the reason for the inventory ‘shortfall’, Thomas discovered the following. 1. Goods costing $800 were sold on credit to A. Anderson for $1650 (GST Inclusive) on 26 June 2019 on DDP terms. The goods were still in transit at 30 June 2019. Thomas had recorded the sale on 26 June 2019 and did not include these goods in the physical stocktake. 2. Thomas included $2200 of goods held on consignment in the physical stocktake. 3. Goods costing $1001 (GST Inclusive) were purchased on credit from Toy Train Trader on 26 June 2019 and received on 28 June 2019. The purchase was unrecorded at 30 June 2019, but the goods were included in the physical stocktake. 4. Goods costing $440 were purchased on credit from Toy Town Supplies on 23 June 2019 on EXW shipping terms. The goods were delivered to the transport company on 27 June 2018. The purchase was recorded on 27 June 2019 but, as the goods had not yet arrived, Thomas did not include these goods in the physical stocktake. 5. At 30 June 2019, Thomas had unsold goods costing $3700 out on consignment. These goods were not included in the physical stocktake. 6. Goods costing $2100 were sold on credit to Kids Corner Playcentre for $4180 on 24 June 2019 on EXW shipping terms. The goods were shipped on 28 June 2019. The sale was unrecorded at 30 June 2019 and Thomas did not include these goods in the physical stocktake. Required (a) Prepare any journal entries necessary on 30 June 2019 to correct any errors and to adjust inventory. Ignore GST. (LO7) (a) (i) As the goods were still in transit under the terms DPP, the seller is responsible for the freight and the seller is still the legal owner until the goods reach their destination. As Thomas had incorrectly recorded a sale, the Inventory account should be $800 larger (= $78 000) and so too should the stocktake figure ($74 200). Assuming GST, the journal entries required to correct the error are: General Journal 2018 June 30 Sales 1 500 GST Payable 150 Accounts Receivable – A. Anderson $1 650 To correct error in recording sales. June 30 Inventory 800 Cost of Sales 800 To correct error in cost of sales and inventory. (ii) Goods held on consignment should not have been included in the stocktake. Hence, after correcting for this error, the physical count for inventory should be ($74 200 – $2200) = $72 000. (iii) As the goods have been received and included already in the stocktake, the item should have been recorded as a purchase. General Journal June 30 Inventory 910 GST Receivable 91 Accounts Payable – Toy Train Trader 1 001 Purchases recorded + GST. This has the impact of increasing the Inventory account by a further $910 to a total of $78 910 (so far). The physical stocktake figure does not change as the inventory has already been included. (iv) The impact of this error is that the goods should have been included in the physical stocktake even though not yet received. Hence the physical stocktake figure should increase by $400 ($440 less GST) to $72 400. No correcting entry is necessary. (v) These goods on consignment legally belong to Thomas and therefore should be included in the physical stocktake, thus making the amount of the physical count increase by $3 700 to $76 100. (vi) As the shipping terms are EXW and the goods have been shipped, the buyer now legally owns the goods and Thomas should have recorded a sale as follows. General Journal 2018 June 30 Accounts Receivable – Kids Corner Playcentre 4 180 GST Payable 380 Sales 3 800 To record sales. June 30 Cost of Sales 2 100 Inventory 2 100 To record cost of sales and inventory. The impact of this entry is to reduce recorded inventory by $2100 down from $78 910 to $76 810. After all errors are corrected the Inventory account should be $76 810, and the physical count should be $76 100. Hence, the loss of inventory through petty theft and breakages is only $710 and is not as bad as Thomas first thought. Problem 13.26 Income statements — periodic inventory system Non-GST version Part A Beyer Ltd balances its accounts at month-end, using special journals, and the perpetual inventory system with the FIFO cost flow assumption. All purchases and sales of inventory are made on credit. The end of the reporting period is 30 June. Ignore GST. Sales and purchases of product JINX-87 in May 2019 were as follows. Required (a) For product JINX-87, calculate May 2019’s cost of sales and cost of inventory on hand at 31 May 2019, using an inventory record. Part B The inventory ledger account balance at 30 June 2019 was $7650, and net realisable value for each product line exceeded cost. The cost of inventory on hand at 30 June 2019 determined by physical count, however, was only $7578. In investigating the reasons for the discrepancy, Beyer Ltd discovered the following. • Goods costing $87 were sold for $100 on 26 June 2019 on DDP shipping terms. The goods were in transit at 30 June 2019. The sale was recorded on 26 June 2019 and the goods were not included in the physical count. • Goods costing $90 were ordered on 24 June 2019 on EXW shipping terms. The goods were delivered to the transport company on 27 June 2019. The purchase was recorded on 27 June 2019 but, as the goods had not yet arrived, the goods were not included in the physical count. • Goods costing $140 held on consignment for Richmond Ltd were included in the physical count. Required (a) Prepare any journal entries required on 30 June 2019 to correct error(s) and to adjust the inventory account (Use the general journal). (LO3 and LO7) Part A (a) FIFO: Perpetual. Purchases Sales Balance Date Explanation Units Unit cost Total cost Units Unit cost Total cost Units Unit cost Total cost 1/5 Beg. invent. 50 $10 $500 7/5 Purchases 20 $11 $220 50 $10 20 $11 $720 11/5 Sales 50 $10 $500 4 $11 $44 16 $11 $176 17/5 Purchases 30 $12 $360 16 $11 30 $12 $536 21/5 Purchases (10) $11 $(110) 6 $11 return 30 $12 $426 24/5 Sales 6 $11 $66 24 $12 $288 6 $12 $72 29/5 Sales (8) $12 $(96) return 14 $12 $168 $802 Ending inventory $168. Cost of sales $802. Part B (a) General Journal Date Particulars Debit Credit 2019 June 30 Sales 100 Accounts Receivable 100 Reverse error in recording sales of item on DDP shipping terms. Inventory 87 Cost of Sales 87 Include items ‘sold’ back into inventory. (inventory ledger account balance is now equal to $7650 + $87 = $7737 Corrected physical balance = $7578 + $87 + $90 – $140 = $7615 Inventory Shortage Expense 122 Inventory 122 Inventory lost or missing. Problem 13.26 Income statements — periodic inventory system GST version Part A Beyer Ltd balances its accounts at month-end, using special journals, and the perpetual inventory system with the FIFO cost flow assumption. All purchases and sales of inventory are made on credit. The end of the reporting period is 30 June. All transactions include GST. Sales and purchases of product JINX-87 in May 2019 were as follows. Date Transaction No. Unit cost May 1 May 7 May 11 May 17 May 21 May 24 May 29 Inventory on hand Purchase(GST inclusive) Sale @ $38.50 per unit (GST Inclusive) Purchase (GST Inclusive) Purchase return (GST Inclusive) Sale @ $39.60 per unit (GST Inclusive) Sale return (on 24 May sale) 50 20 54 30 10 30 8 $10.00 $12.10 $13.20 $12.10 Required (a) For product JINX-87, calculate May 2019’s cost of sales and cost of inventory on hand at 31 May 2019, using an inventory record. Part B The inventory ledger account balance at 30 June 2019 was $7650, and net realisable value for each product line exceeded cost. The cost of inventory on hand at 30 June 2019 determined by physical count, however, was only $7578. In investigating the reasons for the discrepancy, Beyer Ltd discovered the following. • Goods costing $87 were sold for $110 (GST Inclusive) on 26 June 2019 on DDP shipping terms. The goods were in transit at 30 June 2019. The sale was recorded on 26 June 2019 and the goods were not included in the physical count. • Goods costing $99 (GST Inclusive) were ordered on 24 June 2019 on EXW shipping terms. The goods were delivered to the transport company on 27 June 2019. The purchase was recorded on 27 June 2019 but, as the goods had not yet arrived, the goods were not included in the physical count. • Goods costing $140 held on consignment for Richmond Ltd were included in the physical count. Required (a) Prepare any journal entries required on 30 June 2019 to correct error(s) and to adjust the inventory account (Use the general journal). (LO3 and LO7) Part A (a) Note: the cost price of purchases and selling prices need to exclude GST. • May 7 purchase ($12.10 – GST $1.10 = cost $11.00) • May 17 purchase ($13.10 – GST $1.20 = cost $12.00) • May 21 purchase return ($13.10 – GST $1.10 = cost $11.00) • May 7 Sale ($38.50 – GST $3.50 = $35.00) • May 24 sale ($39.60 – GST $3.60 = $36.00) • May 29 sales return ($39.60 – GST $3.60 = $36.00) FIFO: Perpetual Purchases Sales Balance Date Explanation Units Unit cost Total cost Units Unit cost Total cost Units Unit cost Total cost 1/5 Beg. invent. 50 $10 $500 7/5 Purchases 20 $11 $220 50 $10 20 $11 $720 11/5 Sales 50 $10 $500 4 $11 $44 16 $11 $176 17/5 Purchases 30 $12 $360 16 $11 30 $12 $536 21/5 Purchases (10) $11 $(110) 6 $11 return 30 $12 $426 24/5 Sales 6 $11 $66 24 $12 $288 6 $12 $72 29/5 Sales (8) $12 $(96) return 14 $12 $168 $802 Ending inventory $168. Cost of sales $802. Part B (a) General Journal Date Particulars Debit Credit 2019 June 30 Sales 100 GST Payable 10 Accounts Receivable 110 Reverse error in recording sales of item on DDP shipping terms. Inventory 87 Cost of Sales 87 Include items ‘sold’ back into inventory. (inventory ledger account balance is now equal to $7650 + $87 = $7737 Corrected physical balance = $7578 + $87 + $90 – $140 = $7615 Inventory Shortage Expense 122 Inventory 122 Inventory lost or missing. Problem 13.27 Perpetual inventory system with returns Non-GST version During the year ended 30 June 2019, Laing Ltd sold each unit of its goods at $9. Purchases and sales of the goods are shown below. Ignore GST. Laing Ltd uses a perpetual inventory system. Required (a) Using dollars and cents in appropriate inventory records, determine the cost of the inventory at 30 June 2019 under the following inventory cost flow assumptions: i. FIFO ii. moving average (round to the nearest cent). (b) Assuming that a physical count at 30 June 2019 determined that only 325 units remained in inventory, prepare the journal entry to record the fact that some units had gone missing. (c) Using the moving average method, prepare the Inventory Control, Cost of Sales and Sales accounts (T account format) assuming that these accounts are balanced yearly on 30 June. Assume as well that the physical count of inventory was as mentioned in (b) above. (LO3 and LO6) (a) Perpetual System and FIFO Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total 2018 July 1 210 $5.00 $1 050.00 30 125 $5.00 $625.00 85 5.00 425.00 Aug. 25 320 $5.25 $1 680.00 85 5.00 425.00 320 5.25 1 680.00 30 85 5.00 425.00 175 5.25 918.75 145 5.25 761.25 Sept. 3 450 5.30 2 385.00 145 5.25 761.25 450 5.30 2 385.00 10 (50) 5.30 (265.00) 145 5.25 761.25 400 5.30 2 120.00 30 145 5.25 761.25 155 5.30 821.50 245 5.30 1 298.50 Oct 5 300 5.40 1 620.00 245 5.30 1 298.50 300 5.40 1 620.00 Dec. 8 250 5.45 1 362.50 245 5.30 1 298.50 300 5.40 1 620.00 250 5.45 1 362.50 11 245 5.30 1 298.50 45 5.40 243.00 255 5.40 1 377.00 250 5.45 1 362.50 2019 Feb. 21 150 5.50 825.00 45 5.40 243.00 250 5.45 1 362.50 150 5.50 825.00 Mar. 18 100 5.60 560.00 45 5.40 243.00 250 5.45 1 362.50 150 5.50 825.00 100 5.60 560.00 Apr. 30 45 5.40 243.00 250 5.45 1 362.50 145 5.50 797.50 5 5.50 27.50 100 5.60 560.00 May 2 (5) 5.50 (27.5 ) 25 5.45 136.25 (25 ) 5.45 (136.25 ) 150 5.50 825.00 0 100 5.60 560.00 4 250 5.70 1 425.00 25 5.45 136.25 150 5.50 825.00 100 5.60 560.00 250 5.70 1 425.00 June 6 300 5.85 1 755.00 25 5.45 136.25 150 5.50 825 100 5.60 560.00 250 5.70 1 425.00 300 5.85 1 755.00 25 5.45 136.25 150 5.50 825.00 100 5.60 560.00 185 5.70 1 054.50 65 5.70 370.50 300 5.85 1 755.00 10 272.00 Perpetual System and Moving Average Method — Workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total 2018 July 1 210 $5.00 $1 050.00 30 125 $5.00 $625.00 85 5.00 425.00 Aug. 25 320 $5.25 $1 680.00 405 5.20 2 105.00 30 260 5.20 1 352.00 145 5.19 753.00 Sept. 3 450 5.30 2 385.00 595 5.27 3 138.00 10 (50) 5.30 (265.00) 545 5.27 2 873.00 30 300 5.27 1 581 245 5.27 1 292 Oct. 5 300 5.40 1 620.00 545 5.34 2 912 Dec. 8 250 5.45 1 362.50 795 5.38 4 274.5 11 500 5.38 2 690.00 295 5.37 1 584.50 2019 Feb. 21 150 5.50 825.00 445 5.41 2 409.50 Mar. 18 100 5.60 560.00 545 5.45 2 969.50 Apr. 30 300 5.45 1 635.00 245 5.45 1 334.50 May 2 (30) 5.45 (163.500) 275 5.45 1 498 4 250 5.70 1 425.00 525 5.57 2 922.70 June 6 300 5.85 1 755.00 825 5.67 4 677.70 30 460 5.67 2 608.20 365 5.67 2 069.50 10 327.70 (b) The journal entry on 30 June 2019, assuming FIFO to record the units missing, is as follows. June 30 Inventory Shortage Expense 228 Inventory 228 To record inventory shortages (40 $5.70) Assuming moving average, the journal entry would be the same but the amount recorded would be 40 units $5.67 = $226.80. (c) Inventory Control 2018 2019 July 1 Balance b/d 1 050.00 July 30 Cost of sales 625.00 Aug. 25 Accounts payable 1 680.00 Aug. 30 Cost of sales 1 352.00 Sept. 3 Accounts payable 2 385.00 Sept. 10 Accounts payable 265.00 Oct. 5 Accounts payable 1 620.00 30 Cost of sales 1 581.00 Dec. 8 Accounts payable 1 362.50 Dec. 11 Cost of sales 2 690.00 2019 2019 Feb. 21 Accounts payable 825.00 Apr. 30 Cost of sales 1 635.00 Mar. 18 Accounts payable 560.00 June 30 Cost of sales 2 608.20 May 2 Cost of sales 163.50 4 Accounts payable 1 425.00 June 6 Accounts payable 1 755.00 30 Inventory shortage expense 226.80 30 Balance c/d 1 842.70 12 826.00 12 826.00 July 1 Balance b/d 1 842.70 Sales 2018 2018 July 30 Accounts receivable 1 125.00 Aug. 30 Accounts receivable 2 340 00 Sept. 30 Accounts receivable 2 700.00 Dec. 11 Accounts receivable 4 500.00 2019 2019 Apr. 30 Accounts receivable 2 700.00 June 30 P/L Summary 17 505.00 June 30 Accounts receivable 4 140.00 17 505.00 17 505.00 Note: A Sales Returns account is used to record the goods returned from a customer on 4 May 2019. Cost of Sales 2018 July 30 Inventory 625.00 Aug. 30 Inventory 1 352.00 Sept. 30 Inventory 1 581.00 Dec. 11 Inventory 2 690.00 2019 2019 Apr. 30 Inventory 1 635.00 May 2 Inventory 163.50 June 30 Inventory 2 608.20 June 30 P/L Summary 10 327.70 10 491.20 10 491.20 Problem 13.27 Perpetual inventory system with returns GST version During the year ended 30 June 2019, Laing Ltd sold each unit of its goods at $9.90 (GST Inclusive). Purchases and sales of the goods are shown below. 2018 July 1 30 Aug. 25 30 Sept. 3 10 30 Oct. 5 Dec. 8 11 Inventory on hand Sales Purchases Sales Purchases Purchases returns Sales Purchases Purchases Sales 210 units @ $5.00 each 125 units 320 @ $5.78 each (GST Inclusive) 260 units 450 units @ $5.83 (GST Inclusive) 50 damaged units from 3 September purchase 300 units 300 units @ $5.94 (GST Inclusive) 250 units at $6.00 (GST Inclusive) 500 units 2019 Feb. 21 Mar. 18 Apr. 30 May 2 4 Jun. 6 30 Purchases Purchases Sales Sales returns Purchases Purchases Sales 150 units @ $6.05 (GST Inclusive) 100 units at $6.16 (GST Inclusive) 300 units 30 units from 30 April sales, goods returned to inventory 250 units @ $6.27 (GST Inclusive) 300 units @ $6.44 (GST Inclusive) 460 units Laing Ltd uses a perpetual inventory system. Required (a) Using dollars and cents in appropriate inventory records, determine the cost of the inventory at 30 June 2019 under the following inventory cost flow assumptions: i. FIFO ii. moving average (round to the nearest cent). (b) Assuming that a physical count at 30 June 2019 determined that only 325 units remained in inventory, prepare the journal entry to record the fact that some units had gone missing. (c) Using the moving average method, prepare the Inventory Control, Cost of Sales and Sales accounts (T account format) assuming that these accounts are balanced yearly on 30 June. Assume as well that the physical count of inventory was as mentioned in (b) above. Note: it is necessary to remove GST from the purchase price of inventory and selling prices. Selling price = ($9.90 – GST $0.90 = sales price excluding GST $9.00). 2018 • Aug 25 purchase ($5.78 – GST $0.53 =cost $5.25) • Sept 3 purchase ($5.83 – GST $0.53 = cost $5.30) • Sept 30 purchase returns ($5.83 – GST $0.53 = cost $5.30) • Oct 5 purchase ($5.94 – GST $0.54 = cost $5.40) • Dec 8 purchase ($6.00 – GST $0.55 = cost $5.45) 2019 • Feb 21 purchase ($6.05 – GST $0.55 = cost $5.50) • Mar 18 purchase ($6.16 – GST $0.56 = cost $5.60) • May 4 purchase ($6.27 – GST $0.57 = cost $5.70) • Jun 6 purchase ($6.44 – GST $0.59 = cost $5.85) (a) Perpetual System and FIFO Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total 2018 July 1 210 $5.00 $1 050.00 30 125 $5.00 $625.00 85 5.00 425.00 Aug. 25 320 $5.25 $1 680.00 85 5.00 425.00 320 5.25 1 680.00 30 85 5.00 425.00 175 5.25 918.75 145 5.25 761.25 Sept. 3 450 5.30 2 385.00 145 5.25 761.25 450 5.30 2 385.00 10 (50) 5.30 (265.00) 145 5.25 761.25 400 5.30 2 120.00 30 145 5.25 761.25 155 5.30 821.50 245 5.30 1 298.50 Oct 5 300 5.40 1 620.00 245 5.30 1 298.50 300 5.40 1 620.00 Dec. 8 250 5.45 1 362.50 245 5.30 1 298.50 300 5.40 1 620.00 250 5.45 1 362.50 11 245 5.30 1 298.50 45 5.40 243.00 255 5.40 1 377.00 250 5.45 1 362.50 2019 Feb. 21 150 5.50 825.00 45 5.40 243.00 250 5.45 1 362.50 150 5.50 825.00 Mar. 18 100 5.60 560.00 45 5.40 243.00 250 5.45 1 362.50 150 5.50 825.00 100 5.60 560.00 Apr. 30 45 5.40 243.00 250 5.45 1 362.50 145 5.50 797.50 5 5.50 27.50 100 5.60 560.00 May 2 (5) 5.50 (27.5 ) 25 5.45 136.25 (25 ) 5.45 (136.25 ) 150 5.50 825.00 0 100 5.60 560.00 4 250 5.70 1 425.00 25 5.45 136.25 150 5.50 825.00 100 5.60 560.00 250 5.70 1 425.00 June 6 300 5.85 1 755.00 25 5.45 136.25 150 5.50 825 100 5.60 560.00 250 5.70 1 425.00 300 5.85 1 755.00 25 5.45 136.25 150 5.50 825.00 100 5.60 560.00 185 5.70 1 054.50 65 5.70 370.50 300 5.85 1 755.00 10 272.00 Perpetual System and Moving Average Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total 2018 July 1 210 $5.00 $1 050.00 30 125 $5.00 $625.00 85 5.00 425.00 Aug. 25 320 $5.25 $1 680.00 405 5.20 2 105.00 30 260 5.20 1 352.00 145 5.19 753.00 Sept. 3 450 5.30 2 385.00 595 5.27 3 138.00 10 (50) 5.30 (265.00) 545 5.27 2 873.00 30 300 5.27 1 581 245 5.27 1 292 Oct. 5 300 5.40 1 620.00 545 5.34 2 912 Dec. 8 250 5.45 1 362.50 795 5.38 4 274.5 11 500 5.38 2 690.00 295 5.37 1 584.50 2019 Feb. 21 150 5.50 825.00 445 5.41 2 409.50 Mar. 18 100 5.60 560.00 545 5.45 2 969.50 Apr. 30 300 5.45 1 635.00 245 5.45 1 334.50 May 2 (30) 5.45 (163.500) 275 5.45 1 498 4 250 5.70 1 425.00 525 5.57 2 922.70 June 6 300 5.85 1 755.00 825 5.67 4 677.70 30 460 5.67 2 608.20 365 5.67 2 069.50 10 327.70 (b) The journal entry on 30 June 2019, assuming FIFO to record the units missing, is as follows. June 30 Inventory Shortage Expense 228 Inventory 228 To record inventory shortages (40 $5.70) Assuming moving average, the journal entry would be the same but the amount recorded would be 40 units $5.67 = $226.80. (c) Inventory Control 2018 2019 July 1 Balance b/d 1 050.00 July 30 Cost of sales 625.00 Aug. 25 Accounts payable 1 680.00 Aug. 30 Cost of sales 1 352.00 Sept. 3 Accounts payable 2 385.00 Sept. 10 Accounts payable 265.00 Oct. 5 Accounts payable 1 620.00 30 Cost of sales 1 581.00 Dec. 8 Accounts payable 1 362.50 Dec. 11 Cost of sales 2 690.00 2019 2019 Feb. 21 Accounts payable 825.00 Apr. 30 Cost of sales 1 635.00 Mar. 18 Accounts payable 560.00 June 30 Cost of sales 2 608.20 May 2 Cost of sales 163.50 4 Accounts payable 1 425.00 June 6 Accounts payable 1 755.00 30 Inventory shortage expense 226.80 30 Balance c/d 1 842.70 12 826.00 12 826.00 July 1 Balance b/d 1 842.70 Sales 2018 2018 July 30 Accounts receivable 1 125.00 Aug. 30 Accounts receivable 2 340 00 Sept. 30 Accounts receivable 2 700.00 Dec. 11 Accounts receivable 4 500.00 2019 2019 Apr. 30 Accounts receivable 2 700.00 June 30 P/L Summary 17 505.00 June 30 Accounts receivable 4 140.00 17 505.00 17 505.00 Note: A Sales Returns account is used to record the goods returned from a customer on 4 May 2019. Cost of Sales 2018 July 30 Inventory 625.00 Aug. 30 Inventory 1 352.00 Sept. 30 Inventory 1 581.00 Dec. 11 Inventory 2 690.00 2019 2019 Apr. 30 Inventory 1 635.00 May 2 Inventory 163.50 June 30 Inventory 2 608.20 June 30 P/L Summary 10 327.70 10 491.20 10 491.20 Problem 13.28 Inventory cost flow methods — periodic and perpetual — and returns Non-GST version The purchases and sales of Big Flower Pty Ltd of one brand of lawn fertiliser for the year ended 31 December 2019 are contained in the schedule below. The selling price up to 30 June was $12 per unit but was raised to $14 for the rest of the year. Ignore GST. Required (a) Prepare the income statement up to the gross profit stage under the following cost flow assumptions: 1. periodic inventory i. FIFO ii. weighted average 2. perpetual inventory i. FIFO ii. moving average. (b) If 10 of the units sold on 9 October were returned and placed back into inventory, how would this affect profits calculated under A2(a) and A2(b) above? (c) If 5 of the units purchased on 11 December were returned to the supplier, how would this affect profits calculated under A 2(a) and A 2(b) above? (LO2, LO3 and LO6) (a) 1. Periodic Inventory (i) FIFO: Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales (250 $12) + (170 $14) 420 $5 380.00 Less: Cost of sales: Beginning inventory 80 $400.00 Purchases 445 2 386.00 Available for sale 525 2 786.00 Ending inventory 105 584.50 2 201.50 GROSS PROFIT $3 178.50 (1) Ending inventory: (20 $5.65) + (40 $5.60) + (45 $5.50) = $584.50 (ii) Weighted average: Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales 420 $5 380.00 Cost of sales: Available for sale as in 1(a) 525 $2 786.00 Ending inventory 105 557.55 2 228.45 GROSS PROFIT $3 151.55 (2) Ending inventory $2786/525 = $5.31 per unit $5.31 105 = $557.55 2. Perpetual inventory: (i) FIFO: • There will be no difference in the gross profit when the perpetual inventory system is utilised compared with the periodic inventory system under the FIFO cost flow assumption. See inventory card below. (ii) Moving average: • See inventory card below. Sales $5 380.00 Less: Cost of sales 2 207.36 Gross profit $3 172.64 (a) 2. (i) Perpetual System and FIFO Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Jan. 1 80 5.00 400.00 Jan. 7 40 5.00 200.00 40 5.00 200.00 Jan. 30 50 5.10 255.00 40 5.00 200.00 50 5.10 255.00 Feb. 2 27 5.00 135.00 13 5.00 65.00 50 5.10 255.00 Feb. 20 60 5.20 312.00 13 5.00 65.00 50 5.10 255.00 60 5.20 312.00 Feb. 28 13 5.00 65.00 13 5.10 66.30 37 5.10 188.70 60 5.20 312.00 Mar. 16 25 5.20 130.00 13 5.10 66.30 85 5.20 442.00 Mar. 24 30 5.30 159.00 13 5.10 66.30 85 5.20 442.00 30 5.30 159.00 Mar. 27 13 5.10 66.30 78 5.20 405.60 7 5.20 36.40 30 5.30 159.00 Apr. 7 23 5.20 119.60 55 5.20 286.00 30 5.30 159.00 Apr. 15 40 5.35 214.00 55 5.20 286.00 30 5.30 159.00 40 5.35 214.00 Apr. 18 50 5.20 260.00 5 5.20 26.00 30 5.30 159.00 40 5.35 214.00 May 4 30 5.30 159.00 5 5.20 26.00 30 5.30 159.00 40 5.35 214.00 30 5.30 159.00 June 2 20 5.40 108.00 5 5.20 26.00 30 5.30 159.00 40 5.35 214.00 30 5.30 159.00 20 5.40 108.00 June 26 5 5.20 26.00 35 5.35 187.25 30 5.30 159.00 30 5.30 159.00 5 5.35 26.75 20 5.40 108.00 July 27 30 5.40 162.00 35 5.35 187.25 30 5.30 159.00 50 5.40 270.00 Aug. 6 35 5.35 187.25 15 5.30 79.50 15 5.30 79.50 50 5.40 270.00 Aug. 31 60 5.50 330.00 15 5.30 79.50 50 5.40 270.00 60 5.50 330.00 Sept. 11 15 5.30 79.50 45 5.40 243.00 5 5.40 27.00 60 5.50 330.00 Sept. 26 40 5.50 220.00 45 5.40 243.00 100 5.50 550.00 Oct. 9 45 5.40 243.00 15 5.50 82.50 85 5.50 467.50 Nov. 4 40 5.60 224.00 85 5.50 467.50 40 5.60 224.00 Nov. 30 30 5.50 165.00 55 5.50 302.50 40 5.60 224.00 Dec. 11 20 5.65 113.00 55 5.50 302.50 40 5.60 224.00 20 5.65 113.00 Dec. 27 10 5.50 55.00 45 5.50 247.50 40 5.60 224.00 20 5.65 113.00 2 386.00 2 201.50 (a) 2. (ii) Perpetual System and Moving Average Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Jan. 1 80 5.00 400.00 Jan. 7 40 5.00 200.00 40 5.00 200.00 Jan. 30 50 5.10 255.00 90 5.06 455.00 Feb. 2 27 5.06 136.62 63 5.06 318.38 Feb. 20 60 5.20 312.00 123 5.13 630.38 Feb. 28 50 5.13 256.50 73 5.13 373.88 Mar. 16 25 5.20 130.00 98 5.14 503.88 Mar. 24 30 5.30 159.00 128 5.18 662.88 Mar. 27 20 5.18 103.60 108 5.18 559.28 Apr. 7 23 5.18 119.14 85 5.18 440.14 Apr. 15 40 5.35 214.00 125 5.23 654.14 Apr. 18 50 5.23 261.50 75 5.23 392.64 May 4 30 5.30 159.00 105 5.25 551.64 June 2 20 5.40 108.00 125 5.28 659.64 June 26 40 5.28 211.20 85 5.28 448.44 July 27 30 5.40 162.00 115 5.31 610.44 Aug. 6 50 5.31 265.50 65 5.31 344.94 Aug. 31 60 5.50 330.00 125 5.40 674.94 Sept. 11 20 5.40 108.00 105 5.40 566.94 Sept. 26 40 5.50 220.00 145 5.43 786.94 Oct. 9 60 5.43 325.80 85 5.43 461.14 Nov. 4 40 5.60 224.00 125 5.48 685.14 Nov. 30 30 5.48 164.40 95 5.48 520.74 Dec. 11 20 5.65 113.00 115 5.51 633.74 Dec. 27 10 5.51 55.10 105 5.51 578.64 2 386.00 2 207.36 (b) 2. (i) Perpetual System and FIFO Method — workings (extract): Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 345 1 829.00 320 1 656.00 45 5.40 243.00 60 5.50 330.00 Sept. 26 40 5.50 220.00 45 5.40 243.00 100 5.50 550.00 Oct. 9 45 5.40 243.00 15 5.50 82.50 85 5.50 467.50 ? (10) 5.50 (55.00) 95 5.50 522.50 Nov. 4 40 5.60 224.00 95 5.50 522.50 40 5.60 224.00 Nov. 30 30 5.50 165.00 65 5.50 357.50 40 5.60 224.00 Dec. 11 20 5.65 113.00 65 5.50 357.50 40 5.60 224.00 20 5.65 113.00 Dec. 27 10 5.50 55.00 55 5.50 302.50 40 5.60 224.00 20 5.65 113.00 2 386.00 2 146.50 Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales ($5380.00 – $140.00) 410 $5 240.00 Less: Cost of sales 410 2 146.50 GROSS PROFIT $3 093.50 Effect: Sales decreases by $140.00, cost of sales decreases by $55.00 and gross profit decreases by $85.00. (b) 2. (ii) Perpetual System and Moving Average Method — workings (extract): Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 345 1 829.00 320 1 662.06 105 5.40 566.94 Sept. 26 40 5.50 220.00 145 5.43 786.94 Oct. 9 60 5.43 325.80 85 5.43 461.14 ? (10) 5.43 (54.30) 95 5.43 515.44 Nov. 4 40 5.60 224.00 135 5.48 739.44 Nov. 30 30 5.48 164.40 105 5.48 575.04 Dec. 11 20 5.65 113.00 125 5.50 688.04 Dec. 27 10 5.50 55.00 115 5.50 633.04 2 386.00 2 152.96 Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales ($5380.00 – $140.00) 410 $5 240.00 Less: Cost of sales 410 2 152.96 GROSS PROFIT $3 087.04 Effect: Sales decreases by $140.00, cost of sales decreases by $54.40 and gross profit decreases by $85.60. (c) 5 Units Purchased 11/12 Returned to Supplier (Purchase Return). (c) 2. (i) Perpetual System and FIFO Method: Income Statement (Extract) for the year ended 31 December 2010 Units INCOME: Sales 420 $5 380.00 Less: Cost of sales 420 2 201.50 GROSS PROFIT $3 178.50 Effect: No effect on sales, cost of sales or gross profit. Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 425 2 273.00 410 2 146.50 55 5.50 302.50 40 5.60 224.00 Dec. 11 20 5.65 113.00 55 5.50 302.50 40 5.60 224.00 20 5.65 113.00 ? (5) 5.65 (28.25) 55 5.50 302.50 40 5.60 224.00 15 5.65 84.75 Dec. 27 10 5.50 55.00 45 5.50 247.50 40 5.60 224.00 15 5.65 84.75 2 357.75 2 201.50 (c) 2. (ii) Perpetual System and Moving Average Method: Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales 420 $5 380.00 Less: Cost of sales 420 2 207.26 GROSS PROFIT $3 172.74 Effect: No effect on sales, cost of sales or gross profit, except for the 10c rounding. Note: The new balance total after a sale is calculated as the previous balance total minus the sale total. Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 425 2 273.00 410 2 152.26 95 5.48 520.74 Dec. 11 20 5.65 113.00 115 5.51 633.74 ? (5) 5.65 (28.25) 110 5.50 605.49 Dec. 27 10 5.50 55.00 100 5.50 550.49 2 357.75 2 207.26 Problem 13.28 Inventory cost flow methods — periodic and perpetual — and returns GST version The purchases and sales of Big Flower Pty Ltd of one brand of lawn fertiliser for the year ended 31 December 2019 are contained in the schedule below. The selling price up to 30 June was $13.20 (GST Inclusive) per unit but was raised to $15.40 (GST Inclusive) for the rest of the year. Required Required (d) Prepare the income statement up to the gross profit stage under the following cost flow assumptions: 3. periodic inventory iii. FIFO iv. weighted average 4. perpetual inventory iii. FIFO iv. moving average. (e) If 10 of the units sold on 9 October were returned and placed back into inventory, how would this affect profits calculated under A2(a) and A2(b) above? (f) If 5 of the units purchased on 11 December were returned to the supplier, how would this affect profits calculated under A 2(a) and A 2(b) above? (LO2, LO3 and LO6) Note: it is necessary to exclude GST from the selling price per unit. • Selling price at $13.30 – GST $1.20 = selling price $12.00 excluding GST • Selling price at $15.40 – GST $1.40 = selling price $14.00 excluding GST (a) 1. Periodic inventory (i) FIFO: Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales (250 $12) + (170 $14) 420 $5 380.00 Less: Cost of sales: Beginning inventory 80 $400.00 Purchases 445 2 386.00 Available for sale 525 2 786.00 Ending inventory 105 584.50 2 201.50 GROSS PROFIT $3 178.50 (1) Ending inventory (20 $5.65) + (40 $5.60) + (45 $5.50) = $584.50 (ii) Weighted average: Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales 420 $5 380.00 Cost of sales: Available for sale as in 1(a) 525 $2 786.00 Ending inventory 105 557.55 2 228.45 GROSS PROFIT $3 151.55 (2) Ending inventory $2786/525 = $5.31 per unit $5.31 105 = $557.55 (a) 2. Perpetual inventory (i) FIFO: • There will be no difference in the gross profit when the perpetual inventory system is utilised compared with the periodic inventory system under the FIFO cost flow assumption. See inventory card below. (ii) Moving average: • See inventory card below. Sales $5 380.00 Less: Cost of sales 2 207.36 Gross profit $3 172.64 (a) 2. (i) Perpetual System and FIFO Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Jan. 1 80 5.00 400.00 Jan. 7 40 5.00 200.00 40 5.00 200.00 Jan. 30 50 5.10 255.00 40 5.00 200.00 50 5.10 255.00 Feb. 2 27 5.00 135.00 13 5.00 65.00 50 5.10 255.00 Feb. 20 60 5.20 312.00 13 5.00 65.00 50 5.10 255.00 60 5.20 312.00 Feb. 28 13 5.00 65.00 13 5.10 66.30 37 5.10 188.70 60 5.20 312.00 Mar. 16 25 5.20 130.00 13 5.10 66.30 85 5.20 442.00 Mar. 24 30 5.30 159.00 13 5.10 66.30 85 5.20 442.00 30 5.30 159.00 Mar. 27 13 5.10 66.30 78 5.20 405.60 7 5.20 36.40 30 5.30 159.00 Apr. 7 23 5.20 119.60 55 5.20 286.00 30 5.30 159.00 Apr. 15 40 5.35 214.00 55 5.20 286.00 30 5.30 159.00 40 5.35 214.00 Apr. 18 50 5.20 260.00 5 5.20 26.00 30 5.30 159.00 40 5.35 214.00 May 4 30 5.30 159.00 5 5.20 26.00 30 5.30 159.00 40 5.35 214.00 30 5.30 159.00 June 2 20 5.40 108.00 5 5.20 26.00 30 5.30 159.00 40 5.35 214.00 30 5.30 159.00 20 5.40 108.00 June 26 5 5.20 26.00 35 5.35 187.25 30 5.30 159.00 30 5.30 159.00 5 5.35 26.75 20 5.40 108.00 July 27 30 5.40 162.00 35 5.35 187.25 30 5.30 159.00 50 5.40 270.00 Aug. 6 35 5.35 187.25 15 5.30 79.50 15 5.30 79.50 50 5.40 270.00 Aug. 31 60 5.50 330.00 15 5.30 79.50 50 5.40 270.00 60 5.50 330.00 Sept. 11 15 5.30 79.50 45 5.40 243.00 5 5.40 27.00 60 5.50 330.00 Sept. 26 40 5.50 220.00 45 5.40 243.00 100 5.50 550.00 Oct. 9 45 5.40 243.00 15 5.50 82.50 85 5.50 467.50 Nov. 4 40 5.60 224.00 85 5.50 467.50 40 5.60 224.00 Nov. 30 30 5.50 165.00 55 5.50 302.50 40 5.60 224.00 Dec. 11 20 5.65 113.00 55 5.50 302.50 40 5.60 224.00 20 5.65 113.00 Dec. 27 10 5.50 55.00 45 5.50 247.50 40 5.60 224.00 20 5.65 113.00 2 386.00 2 201.50 (a) 2. (ii) Perpetual System and Moving Average Method — workings: Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Jan. 1 80 5.00 400.00 Jan. 7 40 5.00 200.00 40 5.00 200.00 Jan. 30 50 5.10 255.00 90 5.06 455.00 Feb. 2 27 5.06 136.62 63 5.06 318.38 Feb. 20 60 5.20 312.00 123 5.13 630.38 Feb. 28 50 5.13 256.50 73 5.13 373.88 Mar. 16 25 5.20 130.00 98 5.14 503.88 Mar. 24 30 5.30 159.00 128 5.18 662.88 Mar. 27 20 5.18 103.60 108 5.18 559.28 Apr. 7 23 5.18 119.14 85 5.18 440.14 Apr. 15 40 5.35 214.00 125 5.23 654.14 Apr. 18 50 5.23 261.50 75 5.23 392.64 May 4 30 5.30 159.00 105 5.25 551.64 June 2 20 5.40 108.00 125 5.28 659.64 June 26 40 5.28 211.20 85 5.28 448.44 July 27 30 5.40 162.00 115 5.31 610.44 Aug. 6 50 5.31 265.50 65 5.31 344.94 Aug. 31 60 5.50 330.00 125 5.40 674.94 Sept. 11 20 5.40 108.00 105 5.40 566.94 Sept. 26 40 5.50 220.00 145 5.43 786.94 Oct. 9 60 5.43 325.80 85 5.43 461.14 Nov. 4 40 5.60 224.00 125 5.48 685.14 Nov. 30 30 5.48 164.40 95 5.48 520.74 Dec. 11 20 5.65 113.00 115 5.51 633.74 Dec. 27 10 5.51 55.10 105 5.51 578.64 2 386.00 2 207.36 (b) 2. (i) Perpetual System and FIFO Method — workings (extract): Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 345 1 829.00 320 1 656.00 45 5.40 243.00 60 5.50 330.00 Sept. 26 40 5.50 220.00 45 5.40 243.00 100 5.50 550.00 Oct. 9 45 5.40 243.00 15 5.50 82.50 85 5.50 467.50 ? (10) 5.50 (55.00) 95 5.50 522.50 Nov. 4 40 5.60 224.00 95 5.50 522.50 40 5.60 224.00 Nov. 30 30 5.50 165.00 65 5.50 357.50 40 5.60 224.00 Dec. 11 20 5.65 113.00 65 5.50 357.50 40 5.60 224.00 20 5.65 113.00 Dec. 27 10 5.50 55.00 55 5.50 302.50 40 5.60 224.00 20 5.65 113.00 2 386.00 2 146.50 Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales ($5380.00 – $140.00) 410 $5 240.00 Less: Cost of sales 410 2 146.50 GROSS PROFIT $3 093.50 Effect: Sales decreases by $140.00, cost of sales decreases by $55.00 and gross profit decreases by $85.00. (b) 2. (ii) Perpetual System and Moving Average Method — workings (extract): Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 345 1 829.00 320 1 662.06 105 5.40 566.94 Sept. 26 40 5.50 220.00 145 5.43 786.94 Oct. 9 60 5.43 325.80 85 5.43 461.14 ? (10) 5.43 (54.30) 95 5.43 515.44 Nov. 4 40 5.60 224.00 135 5.48 739.44 Nov. 30 30 5.48 164.40 105 5.48 575.04 Dec. 11 20 5.65 113.00 125 5.50 688.04 Dec. 27 10 5.50 55.00 115 5.50 633.04 2 386.00 2 152.96 Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales ($5380.00 – $140.00) 410 $5 240.00 Less: Cost of sales 410 2 152.96 GROSS PROFIT $3 087.04 Effect: Sales decreases by $140.00, cost of sales decreases by $54.40 and gross profit decreases by $85.60. (c) 5 Units Purchased 11/12 Returned to Supplier (Purchase Return). (c) 2. (i) Perpetual System and FIFO Method: Income Statement (Extract) for the year ended 31 December 2010 Units INCOME: Sales 420 $5 380.00 Less: Cost of sales 420 2 201.50 GROSS PROFIT $3 178.50 Effect: No effect on sales, cost of sales or gross profit. Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 425 2 273.00 410 2 146.50 55 5.50 302.50 40 5.60 224.00 Dec. 11 20 5.65 113.00 55 5.50 302.50 40 5.60 224.00 20 5.65 113.00 ? (5) 5.65 (28.25) 55 5.50 302.50 40 5.60 224.00 15 5.65 84.75 Dec. 27 10 5.50 55.00 45 5.50 247.50 40 5.60 224.00 15 5.65 84.75 2 357.75 2 201.50 (c) 2. (ii) Perpetual System and Moving Average Method: Income Statement (Extract) for the year ended 31 December 2019 Units INCOME: Sales 420 $5 380.00 Less: Cost of sales 420 2 207.26 GROSS PROFIT $3 172.74 Effect: No effect on sales, cost of sales or gross profit, except for the 10c rounding. Note: The new balance total after a sale is calculated as the previous balance total minus the sale total. Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Bal. b/d 425 2 273.00 410 2 152.26 95 5.48 520.74 Dec. 11 20 5.65 113.00 115 5.51 633.74 ? (5) 5.65 (28.25) 110 5.50 605.49 Dec. 27 10 5.50 55.00 100 5.50 550.49 2 357.75 2 207.26 Problem 13.29 Cost of sales Non-GST version Pet and Produce Ltd balances its books at month-end, uses special journals, and uses the perpetual inventory system with the moving average cost flow assumption. All purchases and sales of inventory are made on credit. Reporting date is 31 December. Ignore GST. Sales and purchases of product AZL-002 in October 2019 were as follows. Accounts Receivable Control and Accounts Payable Control ledger account balances at 31 October 2019 were $86 600 Dr and $82 470 Cr respectively. Transactions involving Pet and Produce Ltd’s customers and suppliers for November 2019 were as follows. The Inventory Control ledger account balance at 31 December 2019 was $85 590, and net realisable value for each product line exceeded cost. The cost of inventory on hand at 31 December 2019 determined by physical count, however, was only $83 510. In investigating the reasons for the discrepancy, Pet and Produce Ltd discovered the following. • Goods costing $1150 were ordered on 26 December 209 on EXW terms. The transport firm took possession of the goods from the supplier on 28 December 2019. The purchase was recorded on 28 December 2019 but, as the goods had not yet arrived, the goods were not included in the physical count. • $1860 of goods held on consignment for Druin Ltd were included in the physical count. • Goods costing $980 were sold for $1130 on 29 December 2019 on DDP terms. The goods were in transit at 31 December 2019. The sale was recorded on 28 December 2019 and the goods were not included in the physical count. Required (a) For Product AZL-002 calculate October 2019’s cost of sales and the cost of inventory on hand at 31 October 2019. (Round each average unit cost to the nearest cent, but round each total cost amount to the nearest dollar.) (b) Prepare the Accounts Receivable Control and Accounts Payable Control general ledger accounts (T-format) for the period 31 October to 30 November 2019. (c) Prepare any journal entries necessary on 31 December 2019 to correct error(s) and adjust inventory (Use the general journal). (LO3 and LO7) (a) October 2019 cost of sales and inventory on hand at the end of October. Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Oct. 1 52 $12.00 $624 8 30 $13.00 $390 82 12.37 1 014 10 (10) 13.00 (130) 72 12.28 884 13 36 12.28 442 36 12.28 442 16 (12) 12.28 (147) 48 12.28 589 20 50 14.00 700 98 13.15 1 289 26 42 13.15 552 56 13.15 737 $847 (b) Accounts Receivable Control Date Explanation Debit Date Explanation Credit Nov. 1 Balance $86 600 Nov. 13 Sales returns $8 100 30 Sales 112 930 26 Accounts payable 3 940 29 Allowance for doubtful debts 5 160 30 Cash/discount 120 230 30 Balance c/d 62 100 $199 530 199 530 Dec. 1 Balance b/d 62 100 Accounts Payable Control Date Explanation Debit Date Explanation Credit Nov. 1 Balance $82 470 Nov. 22 Inventory 6 170 30 Purchases 137 440 26 Accounts receivable 3 940 30 Cash/discount 142 900 30 Balance c/d 66 900 219 910 219 910 Dec. 1 Balance b/d 66 900 (c) General Journal Dec. 31 Sales 1 130 Accounts Receivable 1 130 To correct error of goods recorded as being sold in the incorrect period. Inventory 980 Cost of Sales 980 To reverse inventory and cost of sales on goods not yet sold. July 20 Inventory Shortage Expense 2 790* Inventory 2 790* To record missing inventory after stocktake. * $85 590 + $980 = $86 570 – $83 780 (see below) = $2790 Workings: Inventory as per stocktake $83 510 Add: Sale incorrectly recorded (DDP) 980 Add: Purchased inventory not included in stocktake (EXW) 1 150 Less: Goods on consignment (1 860) $83 780 Problem 13.29 Cost of sales GST version Pet and Produce Ltd balances its books at month-end, uses special journals, and uses the perpetual inventory system with the moving average cost flow assumption. All purchases and sales of inventory are made on credit. Reporting date is 31 December. Sales and purchases of product AZL-002 in October 2019 were as follows. Date Transaction No. Unit cost Total cost Oct. 1 Oct. 8 Oct. 10 Oct. 13 Oct. 16 Oct. 20 Oct. 26 Inventory on hand Purchase (GST Inclusive) Purchase return (GST Inclusive) Sale @ $16.50 per unit (GST Inclusive) Sale return (on Oct. 13 sale) (GST Inclusive) Purchase(GST Inclusive) Sale @ $17.60 per unit (GST Inclusive) 52 30 10 36 12 50 42 $12.00 $14.30 $14.30 $15.40 $624 $429 $143 $770 Accounts Receivable Control and Accounts Payable Control ledger account balances at 31 October 2019 were $86 600 Dr and $82 470 Cr respectively. Transactions involving Pet and Produce Ltd’s customers and suppliers for November 2019 were as follows. Inventory sales (GST Inclusive) Inventory purchases (GST Inclusive) Cash payments to suppliers (GST Inclusive) Cash receipts from customers (GST Inclusive) Discount received from suppliers(GST Inclusive) Discount allowed to customers (GST Inclusive) Nov. 13: Inventory (not yet paid for) returned by customer(GST Inclusive) Nov. 19: Inventory (paid for) returned to supplier(GST Inclusive) Nov. 22: Inventory (not yet paid for) returned to supplier(GST Inclusive) Nov. 26: Offset of accounts receivable and payable recorded(GST Inclusive) Nov. 29: Debt written off (GST Inclusive) $124 223 151 184 153 802 129 217 3 388 3 036 8 910 4 543 6 787 4 334 5 676 The Inventory Control ledger account balance at 31 December 2019 was $85 590, and net realisable value for each product line exceeded cost. The cost of inventory on hand at 31 December 2019 determined by physical count, however, was only $83 510. In investigating the reasons for the discrepancy, Pet and Produce Ltd discovered the following. • Goods costing $1265 (FGST Inclusive)were ordered on 26 December 209 on EXW terms. The transport firm took possession of the goods from the supplier on 28 December 2019. The purchase was recorded on 28 December 2019 but, as the goods had not yet arrived, the goods were not included in the physical count. • $1860 (excluding GST) of goods held on consignment for Druin Ltd were included in the physical count. • Goods costing $980 (excluding GST) were sold for $1243 (GST Inclusive)on 29 December 2019 on DDP terms. The goods were in transit at 31 December 2019. The sale was recorded on 28 December 2019 and the goods were not included in the physical count. Required (a) For Product AZL-002 calculate October 2019’s cost of sales and the cost of inventory on hand at 31 October 2019. (Round each average unit cost to the nearest cent, but round each total cost amount to the nearest dollar.) (b) Prepare the Accounts Receivable Control and Accounts Payable Control general ledger accounts (T-format) for the period 31 October to 30 November 2019. (c) Prepare any journal entries necessary on 31 December 2019 to correct error(s) and adjust inventory (Use the general journal). (LO3 and LO7) (a) It is necessary to exclude GST from all transactions. October 2019 cost of sales and inventory on hand at the end of October Date Purchases Sales Balance No. Cost Total No. Cost Total No. Cost Total Oct. 1 52 $12.00 $624 8 30 $13.00 $390 82 12.37 1 014 10 (10) 13.00 (130) 72 12.28 884 13 36 12.28 442 36 12.28 442 16 (12) 12.28 (147) 48 12.28 589 20 50 14.00 700 98 13.15 1 289 26 42 13.15 552 56 13.15 737 $847 (b) Accounts Receivable Control Date Explanation Debit Date Explanation Credit Nov. 1 Balance $86 600 Nov. 13 Sales returns $8 100 30 Sales 112 930 26 Accounts payable 3 940 29 Allowance for doubtful debts 5 160 30 Cash/discount 120 230 30 Balance c/d 62 100 $199 530 199 530 Dec. 1 Balance b/d 62 100 Accounts Payable Control Date Explanation Debit Date Explanation Credit Nov. 1 Balance $82 470 Nov. 22 Inventory 6 170 30 Purchases 137 440 26 Accounts receivable 3 940 30 Cash/discount 142 900 30 Balance c/d 66 900 219 910 219 910 Dec. 1 Balance b/d 66 900 (c) General Journal Dec. 31 Sales GST Payable 1 130 113 Accounts Receivable 1 243 To correct error of goods recorded as being sold in the incorrect period. Inventory 980 Cost of Sales 980 To reverse inventory and cost of sales on goods not yet sold. July 20 Inventory Shortage Expense 2 790* Inventory 2 790* To record missing inventory after stocktake. * $85 590 + $980 = $86 570 – $83 780 (see below) = $2790 Workings (note: exclude GST from transactions): Inventory as per stocktake $83 510 Add: Sale incorrectly recorded (DDP) 980 Add: Purchased inventory not included in stocktake (EXW) 1 150 Less: Goods on consignment (1 860) $83 780 Problem 13.30 Effects of inventory errors Non-GST version Below are the income statements for Campbell’s Camping Ltd for the year ended 31 December for 2 years. The following information has been discovered concerning 2019. Ignore GST. 1. On 23 December, Campbell’s Camping Ltd recorded goods purchased at a cost of $2000. The terms were EXW. The goods were delivered by the seller to the transport company on 27 December. The goods were not included in the ending inventory because they had not arrived. 2. Campbell’s Camping Ltd sells goods that it does not own on a consignment basis. Consigned goods on hand at year-end were included in inventory at a cost of $6000. 3. A purchase of goods worth $4500 was made in December, but not recorded until January. The goods were received on 28 December and included in the physical inventory. 4. A sale of goods costing $2000 was made and recorded in December. Since the buyer requested that the goods be held for later delivery, the items were on hand and included in inventory at year-end. 5. Campbell’s Camping Ltd sold goods costing $1400 for $2000 on 26 December. The terms were DDP. The goods arrived at the destination in January. The sale was recorded in 2019, and the goods were excluded from the ending inventory. Required (a) Determine the correct ending inventory figure for 31 December 2019. (b) Prepare revised income statements for 2019 and 2020. (c) Determine the total profit for the 2-year period, both before and after the revisions. Why are these figures similar or different? (LO1 and LO7) (a) Ending inventory as reported 2019 $100 000 Add: Goods in transit – EXW 2 000 Sold goods in transit – DDP 1 400 103 400 Less: Goods held on consignment 6 000 Goods sold but held for customer 2 000 Correct ending inventory $95 400 (b) CAMPBELL’S CAMPING LTD Income Statements For the years ending 31 December 2019 and 2020 2019 2020 INCOME Sales revenue ($325 000 – $2 000) $323 000 ($400 000 + $2 000) $402 000 Cost of sales: Beginning inventory 68 000 95 400 Purchases ($200 000 + $4 500) 204 500 ($220 000 – $4 500) 215 500 Goods available for sale 272 500 310 900 Ending inventory 95 400 90 000 Cost of sales 177 100 220 900 GROSS PROFIT 145 900 181 100 Other expenses 91 000 99 000 PROFIT $54 900 $82 100 (c) As reported: $66 000 + $71 000 = $137 000. As corrected: $54 900 + $82 100 = $137 000. The two figures are the same because inventory errors offset over the two consecutive periods. Problem 13.30 Effects of inventory errors GST version Below are the income statements for Campbell’s Camping Ltd for the year ended 31 December for 2 years. 2019 2020 Sales revenue $325 000 $400 000 Cost of sales: Beginning inventory Purchases 68 000 200 000 100 000 220 000 Goods available for sale Ending inventory 268 000 100 000 320 000 90 000 Cost of sales 168 000 230 000 Gross profit Other expenses 157 000 91 000 170 000 99 000 Profit $ 66 000 $ 71 000 The following information has been discovered concerning 2019. 1. On 23 December, Campbell’s Camping Ltd recorded goods purchased at a cost of $2200 (GST Inclusive). The terms were EXW. The goods were delivered by the seller to the transport company on 27 December. The goods were not included in the ending inventory because they had not arrived. 2. Campbell’s Camping Ltd sells goods that it does not own on a consignment basis. Consigned goods on hand at year-end were included in inventory at a cost of $6000 (excluding GST). 3. A purchase of goods worth $4950 (GST Inclusive) was made in December, but not recorded until January. The goods were received on 28 December and included in the physical inventory. 4. A sale of goods costing $2200 (GST Inclusive) was made and recorded in December. Since the buyer requested that the goods be held for later delivery, the items were on hand and included in inventory at year-end. 5. Campbell’s Camping Ltd sold goods costing $1400 for $2200 (GST Inclusive)on 26 December. The terms were DDP. The goods arrived at the destination in January. The sale was recorded in 2019, and the goods were excluded from the ending inventory. Required (a) Determine the correct ending inventory figure for 31 December 2019. (b) Prepare revised income statements for 2019 and 2020. (c) Determine the total profit for the 2-year period, both before and after the revisions. Why are these figures similar or different? (LO1 and LO7) (a) Ending inventory as reported 2018 $100 000 Add: Goods in transit – EXW (net of GST) 2 000 Sold goods in transit (net of GST) – DDP 1 400 103 400 Less: Goods held on consignment 6 000 Goods sold but held for customer (net of GST) 2 000 Correct ending inventory (net of GST) $95 400 (b) CAMPBELL’S CAMPING LTD Income Statements For the years ending 31 December 2019 and 2020 2019 2020 INCOME Sales revenue ($325 000 – $2 000) $323 000 ($400 000 + $2 000) $402 000 Cost of sales: Beginning inventory 68 000 95 400 Purchases ($200 000 + $4 500) 204 500 ($220 000 – $4 500) 215 500 Goods available for sale 272 500 310 900 Ending inventory 95 400 90 000 Cost of sales 177 100 220 900 GROSS PROFIT 145 900 181 100 Other expenses 91 000 99 000 PROFIT $54 900 $82 100 (c) As reported: $66 000 + $71 000 = $137 000. As corrected: $54 900 + $82 100 = $137 000. The two figures are the same because inventory errors offset over the two consecutive periods. Case studies Decision analysis Inventory and computer retailing Non-GST version During January 2019, Preston’s Personal Computers, a retailer of personal computers, began operations. The transactions for January were as shown below (ignore GST). Other expenses for the month were $1200. Required (a) Record the information on a perpetual inventory record using each of the following methods: i. FIFO ii. moving average iii. LIFO. (b) Prepare an income statement based on each of the three methods of inventory cost flows. (c) Give reasons to the manager of Preston’s Personal Computers for the variations in cost of sales and profit in the three statements. (d) What factors should be considered in choosing an inventory cost flow method? Make a recommendation to management on the appropriate cost flow method to use in this business. (e) Assume that the manager wants to purchase another computer before the end of the month, but asks you first (i) how that will affect the profit for the month, and (ii) whether the purchase should be deferred until early February. The purchase price would not change. What would you recommend? (a) (i) FIFO method: Purchases Sales Balance Unit Total Unit Total Unit Total Date Explanation Units Cost cost Units cost cost Units cost cost 5/1 Purchase 8 $1 300 $10 400 8 $1 300 $10 400 8/1 Sale 3 $1 300 $3 900 5 $1 300 6 500 10/1 Purchase 3 $1 400 4 200 5 $1 300 6 500 3 $1 400 4 200 13/1 Sale 1 $1 300 1 300 4 $1 300 5 200 3 $1 400 4 200 16/1 Sale 2 $1 300 2 600 2 $1 300 2 600 3 $1 400 4 200 22/1 Purchase 4 $1 500 6 000 2 $1 300 2 600 3 $1 400 4 200 4 $1 500 6 000 25/1 Sale 2 $1 300 2 600 3 $1 400 4 200 4 $1 500 6 000 $10 400 (ii) Moving average method: Purchases Sales Balance Unit Total Unit Total Unit Total Date Explanation Units Cost cost Units cost cost Units cost cost 5/1 Purchase 8 $1 300 $10 400 8 $1 300 $10 400 8/1 Sale 3 $1 300 $3 900 5 $1 300 6 500 10/1 Purchase 3 $1 400 4 200 8 $1 338 10 700 13/1 Sale 1 $1 338 1 338 7 $1 338 9 366 16/1 Sale 2 $1 338 2 676 5 $1 338 6 690 22/1 Purchase 4 $1 500 6 000 9 $1 410 12 690 25/1 Sale 2 $1 410 2 820 7 $1 410 9 870 $10 734 (iii) LIFO method: Purchases Sales Balance Unit Total Unit Total Unit Total Date Explanation Units Cost cost Units cost cost Units cost cost 5/1 Purchase 8 $1 300 $10 400 8 $1 300 $10 400 8/1 Sale 3 $1 300 $3 900 5 $1 300 6 500 10/1 Purchase 3 $1 400 4 200 5 $1 300 6 500 3 $1 400 4 200 13/1 Sale 1 $1 400 1 400 5 $1 300 6 500 2 $1 400 2 800 16/1 Sale 2 $1 400 2 800 5 $1 300 6 500 22/1 Purchase 4 $1 500 6 000 5 $1 300 6 500 4 $1 500 6 000 25/1 Sale 2 $1 500 3 000 5 $1 300 6 500 2 $1 500 3 000 $11 100 (b) PRESTON’S PERSONAL COMPUTERS Income Statement for the month ended 31 January 2019 Moving INCOME FIFO Average LIFO Sales revenue (6 $2500 + 2 $2600) $20 200 $20 200 $20 200 Less: Sales returns — — — Net sales 20 200 20 200 20 200 Less: Cost of sales 10 400 10 734 11 100 GROSS PROFIT 9 800 9 466 9 100 LESS: Other expenses 1 200 1 200 1 200 PROFIT $8 600 $8 266 $7 900 (c) The LIFO inventory costing method produced the highest cost of sales and subsequently the lowest reported gross profit and profit. FIFO reported the lowest cost of sales and the highest reported gross profit and profit. Moving average produced cost of sales and gross profit and profit figures between the reported amounts under LIFO and FIFO. The variations are a result of the different inventory costing assumptions adopted under the three methods. How you value your inventory impacts on your reported gross profit and profit. The higher the value placed on ending inventory the higher your reported profit. The lower the value placed on ending inventory the lower the value on your reported profit. (d) Factors to consider when choosing an inventory cost flow method are prices of inventory increasing or decreasing, does the costing method reflect physical movement of inventory and ease of recording inventory transactions. Perhaps a compromise solution for management would be to select the moving average method as it provides an answer between the two extremes, and is also used commonly in computerised accounting packages. Another cost flow method available to management is the specific identification method which may be of use in this business. (e) (i) If there is another purchase at the end of the month, ending inventory value will increase but profit should not change as cost of sales is not changed. (ii)As prices have increased over the month, and if further price increases are anticipated in the next period, it may be prudent to buy the inventory in at the lower price and consequently report higher profit in the future when the goods are sold. If the purchase price does not change, management may purchase to increase reported inventories. Decision analysis Inventory and computer retailing GST version During January 2019, Preston’s Personal Computers, a retailer of personal computers, began operations. The transactions for January were as shown below. Jan. 5 8 10 13 16 22 25 Purchased eight computers for $1430 each (GST Inclusive) Sold three computers for $2750 each (GST Inclusive) Purchased three computers for $1540 each (GST Inclusive) Sold one computer for $2750 each (GST Inclusive) Sold two computers for $2750 each (GST Inclusive) Purchased four computers for $1650 each (GST Inclusive) Sold two computers for $2860 each (GST Inclusive) Other expenses for the month were $1320 (GST Inclusive). Required (a) Record the information on a perpetual inventory record using each of the following methods: i. FIFO ii. moving average iii. LIFO. (b) Prepare an income statement based on each of the three methods of inventory cost flows. (c) Give reasons to the manager of Preston’s Personal Computers for the variations in cost of sales and profit in the three statements. (d) What factors should be considered in choosing an inventory cost flow method? Make a recommendation to management on the appropriate cost flow method to use in this business. (e) Assume that the manager wants to purchase another computer before the end of the month, but asks you first (i) how that will affect the profit for the month, and (ii) whether the purchase should be deferred until early February. The purchase price would not change. What would you recommend? Note: it is necessary to exclude GST from purchases when recording into the inventory cards. (a) (i) FIFO method: Purchases Sales Balance Unit Total Unit Total Unit Total Date Explanation Units Cost cost Units cost cost Units cost cost 5/1 Purchase 8 $1 300 $10 400 8 $1 300 $10 400 8/1 Sale 3 $1 300 $3 900 5 $1 300 6 500 10/1 Purchase 3 $1 400 4 200 5 $1 300 6 500 3 $1 400 4 200 13/1 Sale 1 $1 300 1 300 4 $1 300 5 200 3 $1 400 4 200 16/1 Sale 2 $1 300 2 600 2 $1 300 2 600 3 $1 400 4 200 22/1 Purchase 4 $1 500 6 000 2 $1 300 2 600 3 $1 400 4 200 4 $1 500 6 000 25/1 Sale 2 $1 300 2 600 3 $1 400 4 200 4 $1 500 6 000 $10 400 (ii) Moving average method: Purchases Sales Balance Unit Total Unit Total Unit Total Date Explanation Units Cost cost Units cost cost Units cost cost 5/1 Purchase 8 $1 300 $10 400 8 $1 300 $10 400 8/1 Sale 3 $1 300 $3 900 5 $1 300 6 500 10/1 Purchase 3 $1 400 4 200 8 $1 338 10 700 13/1 Sale 1 $1 338 1 338 7 $1 338 9 366 16/1 Sale 2 $1 338 2 676 5 $1 338 6 690 22/1 Purchase 4 $1 500 6 000 9 $1 410 12 690 25/1 Sale 2 $1 410 2 820 7 $1 410 9 870 $10 734 (iii) LIFO method: Purchases Sales Balance Unit Total Unit Total Unit Total Date Explanation Units Cost cost Units cost cost Units cost cost 5/1 Purchase 8 $1 300 $10 400 8 $1 300 $10 400 8/1 Sale 3 $1 300 $3 900 5 $1 300 6 500 10/1 Purchase 3 $1 400 4 200 5 $1 300 6 500 3 $1 400 4 200 13/1 Sale 1 $1 400 1 400 5 $1 300 6 500 2 $1 400 2 800 16/1 Sale 2 $1 400 2 800 5 $1 300 6 500 22/1 Purchase 4 $1 500 6 000 5 $1 300 6 500 4 $1 500 6 000 25/1 Sale 2 $1 500 3 000 5 $1 300 6 500 2 $1 500 3 000 $11 100 (b) Exclude GST from sale prices: PRESTON’S PERSONAL COMPUTERS Income Statement for the month ended 31 January 2019 Moving INCOME FIFO Average LIFO Sales revenue (6 $2500 + 2 $2600) $20 200 $20 200 $20 200 Less: Sales returns — — — Net sales 20 200 20 200 20 200 Less: Cost of sales 10 400 10 734 11 100 GROSS PROFIT 9 800 9 466 9 100 LESS: Other expenses 1 200 1 200 1 200 PROFIT $8 600 $8 266 $7 900 (c) The LIFO inventory costing method produced the highest cost of sales and subsequently the lowest reported gross profit and profit. FIFO reported the lowest cost of sales and the highest reported gross profit and profit. Moving average produced cost of sales and gross profit and profit figures between the reported amounts under LIFO and FIFO. The variations are a result of the different inventory costing assumptions adopted under the three methods. How you value your inventory impacts on your reported gross profit and profit. The higher the value placed on ending inventory the higher your reported profit. The lower the value placed on ending inventory the lower the value on your reported profit. (d) Factors to consider when choosing an inventory cost flow method are prices of inventory increasing or decreasing, does the costing method reflect physical movement of inventory and ease of recording inventory transactions. Perhaps a compromise solution for management would be to select the moving average method as it provides an answer between the two extremes, and is also used commonly in computerised accounting packages. Another cost flow method available to management is the specific identification method which may be of use in this business. (e) (i) If there is another purchase at the end of the month, ending inventory value will increase but profit should not change as cost of sales is not changed. (ii) As prices have increased over the month, and if further price increases are anticipated in the next period, it may be prudent to buy the inventory in at the lower price and consequently report higher profit in the future when the goods are sold. If the purchase price does not change, management may purchase to increase reported inventories. Critical thinking Inventory values in financial statements During an audit of the inventory records of Winthrop Ltd for the year ended 30 June 2019, the auditor discovered that the ending inventory balance was overvalued by $36 000. On further investigation, it was discovered as well that the ending inventory for the previous year was correctly counted and valued, but that the inventory balance as at 30 June 2017 was undervalued by $100 000. Spurred on by the concern for errors undetected in previous periods, a thorough investigation was carried out as to the inventory values shown in the company’s financial statements during its 5-year history. The following additional errors were detected. 1. As at 30 June 2016, inventory was overvalued by $10 000. 2. As at 30 June 2015, inventory was undervalued by $60 000. Required (a) Determine the effects that these errors have had on the company’s profit figures in each year, beginning in the year ended 30 June 2015. (b) Determine the effect of the inventory errors on the company’s balance sheet over the total time period. Include in your answer the cumulative impact on the company’s retained earnings. (a) A statement of over-valuations and under-valuations as they affect cost of sales and profit levels is provided below. (Under-valuations are shown in brackets). 2015 2016 2017 2018 2019 Beginning inventory — ($60 000) $10 000 ($100 000) — Ending inventory ($60 000) 10 000 (100 000) — $36 000 Cost of sales 60 000 (70 000) 110 000 (100 000) (36 000) Profit (60 000) 70 000 (110 000) 100 000 36 000 (b) The effect of the inventory errors on the company’s balance sheet is shown by considering the ending inventory row in A above. The cumulative effect on retained earnings for Winthrop Ltd is as follows. Retained earnings are: • Understated by $60 000 on 30 June 2015. • Overstated by $10 000 on 30 June 2016. • Understated by $100 000 on 30 June 2017. • Neither overstated or understated on 30 June 2018 (because all prior inventory errors are eliminated at that date.) • Overstated by $36 000 on 30 June 2019. Communication and leadership Inventory errors The manager of Felicity’s Fashions Ltd, importer and wholesaler of fashion clothing for women, has been investigating the inventory levels of the business at the end of the previous year ended 30 June 2018. She discovered, in consultation with the purchasing department, that an error had been made in the physical count on that date, which resulted in the inventory balance being overstated by $800 000. She also discovered that the inventory balance at 30 June 2019 had been correctly determined. She commented to the accountant that the profit figure for the year ending 30 June 2019 should also be correct, and that there is no point worrying about the error of $800 000 anymore. Required (a) Assume that you are the accountant for Felicity’s Fashions Ltd. In discussion with two or three other members of the ‘accounting department’ of the business (other students), draft a memo to the manager clarifying the situation and assessing the truth of the manager’s remarks. (a) Students should break up into groups of 3 to 4 students. Nominate each student for a role, i.e. the accountant for Felicity’s Fashions Ltd, the manager of Felicity’s Fashions Ltd, one person for note-taking and one person to act as group coordinator. Conduct a mini role play and note your conclusions for presentation of your group discussion. The idea is for all students to each take an active part in this group activity. Possible discussion topics: • The effect of overstating ending inventory balance by $800 000 in the year ended 30 June 2018 will overstate reported profit by $800 000 in the same year. • The reported profit to 30 June 2019 will also be affected. The ending inventory balance to the 30 June 2018 is the same figure used as opening inventory balance in the financial statement to the year ended 30 June 2019. • The effect of overstating opening inventory balance by $800 000, is that reported profit will be understated by $800 000 for the financial year ending 30 June 2019. • Therefore, in the year 2018, profit will be overstated by $800 000 and in year 2019, profit will be understated by the same amount. • If the ending inventory to 30 June 2019 is correct, the error in calculating ending inventory to 30 June 2018 will correct itself. • Therefore, the manager’s comments are correct but the accountant may be more concerned with reporting the correct profit for years 2018 and 2019. • Discuss effect of errors on ratio analysis. For example, how the calculations for gross profit margin, profit margin and inventory turnover may be affected. Financial analysis JB Hi-Fi Limited Refer to the consolidated financial statements in the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. 1. What value is placed on the consolidated group’s inventories at the end of the current year? 2. Determine the accounting policies used by JB Hi-Fi Limited for the valuation of inventories. Briefly outline the features of the system used. 3. Were any inventories valued using the lower of cost and net realisable value rule? If so, what value is placed on these inventories? 4. How much is reported as the cost of sales for the group of companies? Please note: the solution below is based on the JB Hi-Fi Limited Annual Report for 2016, available on the JB Hi-Fi Limited website. 1. Value of inventories in the consolidated group at 30 June 2016 is $546 437 000. 2. See Note 7 to the financial statements. At 30 June 2016, all inventories were valued at the lower of cost and net realisable value. Costs are assigned to individual items of inventory on the basis of weighted average costs. 3. Yes, all inventories were valued using the lower of cost and net realisable value rule. The value of inventories is $546 437 000 at 30 June 2016. 4. Cost of sales is disclosed by the JB Hi-Fi Limited in the income statement as $3 089 059 000 for the year ended 30 June 2016. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568
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