PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS
Chapter 8
Inventory
LearningObjectives
8.1 Accounting Standards and Policies on Inventory Valuation
8.2 Define:
■■ Inventory.
■■ Cost of Inventory.
■■ Net Realisable Value.
■■ Replacement Cost.
8.3 Inventories in Different Businesses.
8.4 Inventory Measurement.
8.5 The Lower of Cost and Net Realisable Value.
8.6 Assignment of Costs to Inventory.
■■ Specific Identification.
■■ First In First Out (FIFO).
■■ Average Cost (Weighted).
8.7Valuation of Inventory.
■■ Perpetual Inventory System.
■■ Periodic Inventory System.
8.8 Perpetual Inventory Systems.
8.9 Periodic Inventory Systems.
8.10 Periodic versus Perpetual Inventory Systems.
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8.11 Preparation of inventory cards using:
■■ First In First Out (FIFO).
■■ Average Cost (Weighted).
■■ Demonstrating by entry:
■■ Purchases.
■■ Issues.
■■ Purchases returns.
■■ Issue returns.
■■ End of period adjustment for discrepancy.
8.12 Income Statements with Inventory.
8.13 Effect of value assigned to Inventory on Profit and Balance Sheet.
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Overview
Inventory (or stock) is any merchandise, goods or products that has been acquired for resale in the ordinary course of business and has not been sold.
Inventory is classified as a current asset in the balance sheet, as it would, in the ordinary course of business, be converted into cash within 12 months of the balance sheet date. Inventory that has been sold is a trading expense in the income statement.
In a manufacturing business, inventory includes any raw materials or components yet to be issued to production, any partly completed production (work in progress) or any completed production not yet sold (finished goods).
Some service industries may have inventory such as spare parts held by a mechanic, stationery supplies for a typing service and amalgams etc. for a dentist.
For most businesses the purchase or production of inventory is an important business activity. Inventory levels and inventory quality are important considerations in maximising profits.
The fundamental basis of inventory valuation is its cost. Cost is the aggregate of the purchase price and any other costs incurred in getting the inventory into condition and location for sale.
If it is likely that the future proceeds from the sale of certain inventory items will not cover their costs to date and in the future, then the irrecoverable cost (loss) must be recognised in the current reporting period. To achieve this, those inventory items are required to be valued at their net realisable value; the other inventory items are valued at their cost.
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8.1 AccountingStandards
Accounting Standard AASB 102 – Inventories prescribes the accounting treatment for inventories.
The Standard applies to all inventories except work in progress arising under construction contracts, agricultural produce, financial instruments and marketable securities.
The Standard requires that, generally, inventory shall be measured at the lower of cost and net realisable value on an item by item basis. Inventory for not-for-profit entities are to be measured at the lower of cost and current replacement cost.
The Standard requires each class of inventory to be separately disclosed in the financial statements differentiating between raw materials, work in progress, finished goods and land held for resale. The method of valuing inventory for each class must also be disclosed.
Generally Accepted Accounting Principles (GAAP) require that, once a valuation method has been selected, a business should not change the valuation method without disclosing the change and the impact of the change in the financial report.
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8.2 Definitions
Inventory
Inventories are assets:
■■ held for sale in the ordinary course of business;
■■ in the process of production for such sale; or
■■ in the form of materials or supplies to be consumed in the production process or in the rendering of service.
Cost of Inventory
The cost of inventory is the aggregate of:
■■ the cost of purchase;
■■ the cost of conversion (labour and other production costs); and
■■ other costs incurred in bringing the inventory to its present location and condition.
Net Realisable Value
Net realisable value is the estimated proceeds of sale less, where applicable, all further costs to the stage of completion and less all costs to be incurred in marketing, selling and distribution to customers.
Replacement Cost
Replacement cost is the cost that an identical inventory item could be purchased for, or manufactured for, under normal purchasing or production conditions.
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8.3 InventoriesindifferentBusinesses
Identification of goods as inventory will depend upon the nature of the business operations and the purpose for which the goods are acquired. What may be a non-current asset for one type of business, e.g. a computer for a furniture retail business, would be inventory for a computer retail business, i.e. held for resale in the ordinary course of business. Similarly, a motor vehicle used for deliveries would be a non -current asset for a hardware business but could be inventory for a motor vehicle trader.
In one retail business the goods for resale may be acquired in a state suitable for immediate sale. In another retail business, the goods for resale may be acquired in a bulk state that has to be repackaged in a form convenient for sale.
In a factory, the inventory could consist of, and be identifiable as, one or all of the following:
■■ Raw Material:-component parts yet to be issued to production.
■■ Work in Progress: partly completed production.
■■ Finished Goods: completed production.
8.4 InventoryMeasurement
Accounting Standard AASB 102 requires that inventory shall be measured at the lower of cost and net realisable value on an item by item basis.
However, if it is impracticable to measure items of inventory separately because there is a large number of similar items, or like items of inventory each having an insignificant cost, then inventories may be measured by groups of items.
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8.5 TheLowerofCostandNetRealisableValue
Under historical cost accounting, the principal basis for valuing inventory held at balance date is cost.
Cost of Inventory is defined as the aggregate of:
■■ the cost of purchase;
■■ the cost of conversion (labour and other production costs); and
■■ other costs incurred in bringing the inventory to its present location and condition.
If it is likely that the proceeds from the sale of some inventory items will not cover their costs to date and in the future, then the irrecoverable cost (i.e. loss) must be recognised in the current reporting period. To achieve this, those inventory items must be valued at their net realisable value whilst the other inventory items must be valued at their cost.
Net Realisable Value is defined as the estimated proceeds of sale less, where applicable, all further costs to the stage of completion and less all further costs to be incurred in marketing, selling and distribution.
Circumstances in which net realisable value is likely to be less than the cost of inventory include:
■■ A fall in selling price.
■■ Physical deterioration.
■■ Obsolescence.
■■ A marketing strategy to sell at a loss.
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Example
Gamma Electrical has the following summary of inventory items at the end of the year:
At Cost At NRV
Television 1 $ 5,000 $ 12,000
Television 2 2,000 1,600
Refrigerator 1 800 600
Refrigerator 2 1,600 2,500
Microwave 1 200 500
Microwave 2 500 400
Microwave 3 500 1,200
Required: Determine the value of inventory, for financial statement purposes, after applying the “lower of cost and net realisable value” rule.
Solution
Gamma Electrical – Inventory Schedule
At Cost At NRV Inventory Value
Television 1 $ 5,000 $ 12,000 $ 5,000
Television 2 2,000 1,600 1,600
Refrigerator 1 800 600 600
Refrigerator 2 1,600 2,500 1,600
Microwave 1 200 500 200
Microwave 2 500 400 400
Microwave 3 500 1,200 500
9,900
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Self -Testing Exercise 1
The following data is provided in respect of the inventory of Jay Co at 30 June 2011:
Item At Cost At NRV
A $ 1,000 $ 1,200
B 1,000 850
C 800 650
D 1,600 1,800
E 2,000 3,000
F 600 500
Required: Applying the lower of cost and net realisable value rule, determine the value of inventory for financial statement purposes, for Jay Co for the year ended 30 June 2011 (show workings).
8.6 AssignmentofCoststoInventories
AASB 102 recognises the assignment of costs to inventories by one or more of the following methods:
■■ Specific Identification.
■■ First-In-First-Out (FIFO).
■■ Weighted Average Cost.
The method adopted must be appropriate to the circumstances and must be applied consistently from period to period.
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SpecificIdentificationThis method assigns costs to each identified unit of inventory, the identification being by means of tags or serial numbers placed on or near the units (e.g. motor vehicle manufacturers give each vehicle a unique stock number).
The Specific Identification method is appropriate where there is a limited variety of items, generally identifiable individually, with costs being able to be traced to the items, or where there are large value items.
Example
Inventory transactions for Alpha for the month of June 2011 are as follows:
Inventory at 1 June 2011: Item A – at cost $ 500
Item B – at cost 400
Purchases during June 2011: 05/06 Item E – at cost 500
15/06 Item F – at cost 800
22/06 Item G – at cost 600
Sales during June 2011: 08/06 Item A 1,200
22/06 Item F 1,500
28/06 Item G 1,000
Required: Prepare an Inventory Schedule at 30 June 2011.
Solution
Alpha – Inventory Schedule at 30 June 2011
Date Item Cost Sold Inventory 30 June
01/06/11 A $ 500 08/06/11 –
B 400 – $ 400
05/06/11 E 500 – 500
15/06/11 F 800 22/06/11 -
22/06/11 G 600 28/06/11 –
Inventory Value $ 900
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Self-Testing Exercise 2
Colin Plate owned a second hand motor vehicle trading business. He had the following transactions during May 2011.
01/05/11 Opening Inventory: Cost
Commodore CAT 123 $ 25,200
Falcon DOG 456 24,100
Corsair RAT 789 23,000
10/05/11 Purchased Laser HAY 101 23,600
12/05/11 Sold – Falcon DOG 456
15/05/11 Purchased - Colt OAT 202 22,100
20/05/11 Sold – Laser HAY 101
Required: Determine the closing inventory for Colin at 31 May 2011.
FirstInFirstOut(FIFO)This method assumes that inventory purchased or produced first is sold or issued first, irrespective of whether or not this actually occurs. Thus inventory is valued on the basis that inventory quantities on hand are the latest purchased or produced.
Many businesses will physically use the earliest purchased or produced units by identifying the units using numbers or dates, especially if the items are perishable or otherwise subject to deterioration. It is a method that is appropriate where numerous like items are purchased at different times and at different costs.
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Example
1 March 200 units purchased at $2.00 each
1 April 400 units purchased at $2.50 each
1 May 200 units purchased at $3.00 each
30 June 300 units in inventory
Valuation of inventory:
200 units at $3.00 (May 1 purchase) = $600.00 100 units at $2.50 (April 1 purchase) = 250.00300 units $850.00
Self Testing Exercise 3
Tom Boughton began trading in a new line of merchandise on 1 July 2011 and during July had the following transactions:
01/7/2011 Purchased 100 items @ $77 each $7,700
09/7/2011 Purchased 80 items @ $60 each $4,800
16/7/2011 Purchased 120 items @ $65 each $7,800
20/7/2011 Sold 140 items
31/7/2011 Closing Inventory was 160 items
Required: Valuation of inventory at 31 July 2011 using the FIFO Method.
WeightedAverageCostThis method values inventory using an average of inventory cost at the beginning of the period and inventory cost during the period weighted by inventory quantities. It is also a method that is appropriate where numerous like items are purchased or produced at different times and at different costs.
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Example
■■ 200 units are purchased at $4.00 each.
■■ 400 units are purchased at $2.50 each.
The weighted average purchase price is calculated:
200 units x $4.00 = $ 800.00 400 units x $2.50 = 1,000.00 600 units Total Cost = $1,800.00
Weighted average cost = $1,800 = $3.00 per unit 600
If inventory on hand was 300 units, then the value of inventory would be:
300 units x $3.00 = $900
Self-Testing Exercise 4
Tom Boughton began trading in a new line of merchandise on 1 July 2011 and during July had the following transactions:
01/7/2011 Purchased 100 items @ $77 each $7,700
09/7/2011 Purchased 80 items @ $60 each $4,800
16/7/2011 Purchased 120 items @ $65 each $7,800
20/7/2011 Sold 140 items
31/7/2011 Closing Inventory was 160 items
Required: Value inventory at 31 July 2011 using the Weighted Average Method.
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8.7 ValuationofInventory
The valuation of inventory at the end of an accounting period is an essential part in the process of matching the costs of a period with the revenues of that period.
The valuation of inventory has two steps:
■■ The identification of the quantity of inventory.
■■ The assignment of value to that inventory.
There are two methods of recording and valuing inventory:
■■ The Perpetual Inventory System.
■■ The Periodic Inventory System.
8.8 PerpetualInventorySystem
The perpetual inventory system involves maintaining a current and continuous record of all inventory transactions. The record may be manually maintained using an inventory card or maintained using a computer system. The use of computerisation and the availability of transaction-specific programs has seen the Perpetual Inventory System emerge as a more commonly used means of recording inventory.
Advantages of the perpetual system are:
■■ Improved internal control;
■■ Accurate and timely information for decision making.
The main disadvantage is the cost and time incurred in maintaining the system.
A separate record (inventory card) is maintained for each item of inventory. The total value of these separate inventory records should equal the balance of the Inventory Control account in the General Ledger.
The separate inventory records are a subsidiary record to the Inventory Control account in the same way as the separate accounts receivable accounts are subsidiary to the Accounts Receivable Control account in the General Ledger. When an entry is made in the inventory records, a corresponding entry should be made in the Inventory Control account.
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LedgerAccounts:PerpetualInventorySystemIn a Perpetual Inventory System, the Inventory Control account is increased when inventory is purchased and decreased when inventory is sold or, in the case of a factory, when issued to production. All entries in the Inventory Control Account are at cost price.
The following illustrates the entries made for sales and purchases:
Sales Inventory Cost of Goods Sold
Accounts Receivable Accounts Payable
GST Collected GST Paid
(Net of GST)
(Net of GST)
(Including GST)(Including GST)
Goods Sold
Goods Purchased
Goods Sold
The Inventory Control account is a current asset account. When inventory is sold an entry must be made in a Cost of Goods Sold account. This is an expense account to be matched against sales revenue to arrive at the gross profit or loss for the period. In both accounts, all items are recorded at cost. All entries in the Inventory Control account and Cost of Goods Sold account are exclusive of GST.
At the end of the financial year, it is usual to perform a physical inventory or stocktake to determine whether the physical record agrees with the inventory records. Any variances are investigated and this is part of the internal control system. Variances may be caused by theft, fraud, recording errors, breakage, wastage, obsolescence etc. The reasons for variances are important to enable managers to prevent their reoccurrence.
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The following is an example of a perpetual inventory record. The record shows each inventory movement (purchase, sale) and the inventory balance after each inventory movement.
Inventory Record
Date Purchases Sales Balance
Qty Unit Cost ($)
Value ($) Qty Unit Cost ($)
Value ($) Qty Unit Cost ($)
Value ($)
01/06/11 4 20.00 80
20/06/11 10 20.00 200 14 20.00 280
25/06/11 3 20.00 60.00 11 20.00 220
Journalentries:PerpetualInventorySystemThe basic journal entries for the Perpetual Inventory System are as follows:
Purchases of Inventory
Debit Inventory Control 200Debit GST Paid 20Credit Accounts Payable 220 Purchaseofinventory
Credit Sales of Inventory
Debit Accounts Receivable Control 99Credit Sales 90Credit GST Collected 9 Saleofinventoryat$30/unit
Cost of Goods Sold transfer
Debit Cost of Goods Sold 60Credit Inventory Control 60 Costofsales(3unitsat$20)transferred
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If the stocktake had shown 10 items on hand instead of 11 there would have been an inventory loss of $20 (1 unit at $20). The following end-of-period adjustment would be necessary to reconcile the Inventory Control account balance with the physical inventory:
Debit Cost of Goods Sold 20Credit Inventory Control 20 Transfertoadjustinventorybalance(Inventoryloss)
Alternatives are to debit inventory variance or inventory discrepancy with the inventory loss.
Debit Inventory Loss 20Credit Inventory Control 20 Transfertoadjustinventorybalance(Inventoryloss)
Debit Profit & Loss 20Credit Inventory Loss 20 Transferofaccountbalance
It is possible for the stocktake to reveal a physical quantity greater than that shown in the inventory records. This would mean a stock gain has occurred and the adjusting journal entry is the reverse of the inventory loss journal entry.
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8.9 PeriodicInventorySystem
For some businesses the cost and time involved in maintaining a perpetual inventory system may not be beneficial and the Periodic Inventory System would be used. Acquisitions of inventory would be recorded in a Purchases account at cost price, not in an Inventory Control account. When inventory is sold it is recorded in the Sales account at selling price. There is no entry to a Cost of Goods Sold account at the time of the sale.
For the Periodic Inventory System, the beginning balance in the inventory account is not changed until the end of the accounting period. As there is no record of inventory movements during the accounting period it is necessary to perform a stocktake at the end of the accounting period. The stocktake involves the counting, listing and valuing of the items comprising inventory. Once the stocktake has been completed the cost of goods sold may be calculated by:
$
Value of inventory at beginning of the period 8,000
Add Purchases during the period 20,000
28,000
Less value of inventory at end of the period 10,000
Cost of Goods Sold 18,000
The ending inventory for the current period becomes the beginning inventory for the next period.
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Journalentries:PeriodicInventorySystemThe basic journal entries for the Periodic Inventory System are as follows:
Purchases of Inventory
Debit Purchases 20,000Debit GST Paid 2,000Credit Accounts Payable 22,000 Purchasesofinventory
Credit Sales of Inventory
Debit Accounts Receivable Control 39,600Credit Sales 36,000Credit GST Collected 3,900 Salesofinventory
Opening Inventory transfer
Debit Trading 8,000Credit Inventory Control 8,000 Openingbalancetransfer
Closing Inventory brought to account
Debit Inventory Control 10,000Credit Trading 10,000 Closinginventoryasperstocksheet
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8.10 PeriodicvsPerpetualInventorySystems
The periodic inventory system relies on a physical count of inventory on hand at the end of each accounting period. The perpetual inventory system maintains continually updating records of inventory on hand and only uses the physical count to check the accuracy of the perpetual records.
Advantages of Periodic Inventory Systems:
■■ Simpler records;
■■ More suited to manual accounting systems;
■■ More suited to small businesses without computer assistance.
Advantages of Perpetual Inventory Systems:
■■ Inventory cards provide an immediate indication of inventory levels;
■■ Frequent profit calculations can be made from identifiable inventory levels;
■■ Increased internal control over inventory.
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PeriodicandPerpetualInventorySystemsContrasted
Perpetual Inventory System Periodic Inventory System
Dr. Inventory Control 20,000 Dr. Purchases 20,000
Dr. GST Paid 2,000 Dr. GST Paid 2,000
Cr. Accounts Payable 22,000 Cr. Accounts Payable 20,000
Inventory Purchases Inventory Purchases
Dr. Accounts Receivable 39,600 Dr. Accounts Receivable 39,600
Cr. Sales 36,000 Cr. Sales 36,000
Cr. GST Collected 3,600 Cr. GST Collected 3,600
Sales of inventory Sales of inventory
Dr. Cost of Goods Sold 18,000
Cr. Inventory Control 18,000
C.O.G.S. transfer
Extract of Income Statement
Perpetual Inventory System Periodic Inventory System
Sales 36,000 Sales 36,000
Less Less
Cost of Goods Sold: 18,000 Cost of Goods Sold:
Gross Profit 18,000 Opening Inventory 8,000
Add Purchases 20,000
28,000
Less Closing Inventory 10,000 18,000
Gross Profit 18,000
Although the method of recording the transactions is different under the two methods, the gross profit should be the same for both.
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8.11 PreparationofInventoryCards
The Perpetual Inventory System operates using a separate record, a Stock Card or Inventory Card, for each item of trading stock or factory material. The Inventory Card may also be referred to as an Inventory Ledger Card. This record is a subsidiary inventory record of the Inventory Control account in the General Ledger.
The Inventory Cards are continuously updated for purchases and issues so that they provide an up to date record of inventory at all times. In some circumstances the card may only record quantities but in most cases it will include cost details. The card usually has brief description details of the inventory item, e.g. part / serial number, the name and address of the supplier, re-order point, order quantity, etc.
Points to note in the preparation of Inventory Cards using FIFO or Weighted Average:
1. The purchase cost for FIFO and Weighted Average are the same as per the supplier’s invoice.
2. If the cost of inventory is rising, then under FIFO, inventory would have a higher value than for Weighted Average, as the latter is based on a calculation that includes older transactions, usually at a lower unit cost. If the cost of inventory is falling then the converse applies.
3. Returns are recorded at the same unit price as the original issue transaction and recorded as a negative transaction. Returns to suppliers will be recorded in the Purchases or Receipts section on the card and returns by customers will be recorded in the Sales or Issues section of the card.
4. In preparing an Inventory Card using Weighted Average, any transaction that has a per unit value that is different to the current weighted average value, will result in a change to the weighted average.
5. If the stocktake at the end of the accounting period shows a different quantity to that on the inventory card, an adjustment will need to be made to the balance on hand on the inventory card. A loss adjustment under FIFO will be at the oldest inventory value of current inventory. A gain adjustment will be at the latest inventory cost. For Weighted Average any adjustment will be at the current weighted average value.
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Example: Inventory Card using the FIFO method.
Acme Trading maintains a perpetual inventory system and has the following transactions for an inventory item for June 2011.
01/06/11 Opening Balance 40 units @ $ 8.00 $ 320
03/06/11 Sale 20 units
13/06/11 Purchase 80 units @ $ 9.00 $ 720
15/06/11 Sale 40 units
27/06/11 Purchase 40 units @ $ 10.00 $ 400
28/06/11 Sale 25 units
Required:
(a) Prepare an Inventory Card using FIFO.
(b) Prepare Journal Entries for:
(i) Purchases.
(ii) Cost of Goods Sold.
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Solution: Acme Trading
(a) Inventory Card – FIFO
DatePurchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $
01/06/11 40 8.00 320
03/06/11 20 8.00 160 20 8.00 160
20 8.00 160
13/06/11 80 9.00 720 80 9.00 720
100 880
15/06/11 20 8.00 160
20 9.00 180 60 9.00 540
40 340 60 9.00 540
60 9.00 540
27/06/11 40 10.00 400 40 10.00 400
100 940
28/06/11 25 9.00 225 35 9.00 315
40 10.00 400
75 715
Totals 120 1,120 85 725
(b)
30/06/11 Inventory Control 1,120 Accounts Payable 1,120 PurchasesforJune
30/06/11 Cost of Goods Sold 725 Inventory Control 725 CostofGoodsSoldforJune
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Self-Testing Exercise 5
Micro Productions maintains a perpetual inventory system. The following transactions occurred in June 2011:
01/06/11 Opening Balance 60 units @ $ 6.00 $ 360
04/06/11 Purchase 100 units @ $ 6.20 $ 620
10/06/11 Issue 40 units
17/06/11 Issue 40 units
18/06/11 Purchase 100 units @ $ 6.35 $ 635
24/06/11 Issue 40 units
Required:
(a) Prepare an Inventory Card using FIFO;
(b) Prepare Journal Entries for Purchases and for Cost of Goods Sold.
Example: Inventory Card using the Weighted Average method
Use the same data for Acme Trading as in the Example for FIFO.
Required:
(a) Prepare an Inventory Card using the Weighted Average method.
(b) Prepare Journal Entries for:
(i) Purchases.
(ii) Cost of Goods Sold.
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Solution: Acme Trading
(a) Inventory Card – Weighted Average
Purchases Sales Balance
Date Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $
01/06/11 40 8.00 320
03/06/11 20 8.00 160 20 8.00 160
13/06/11 80 9.00 720 100 8.80 880
15/06/11 40 8.80 352 60 8.80 528
27/06/11 40 10.00 400 100 9.28 928
28/06/11 25 9.28 232 75 9.28 696
Totals 120 1,120 85 744
(b)
30/06/11 Inventory Control 1,120 Accounts Payable 1,120 PurchasesforJune
Cost of Goods Sold 744 Inventory Control 744 JuneCostofGoodsSoldtransferred
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Self-Testing Exercise 6
Use the same data for Micro Productions in Self-Testing Exercise 5.
Required:
(a) Prepare an Inventory Card using the Weighted Average method.
(b) Prepare Journal Entries for:
(i) Purchases.
(ii) Cost of Goods Sold.
InventoryCardsrecordingPurchasesReturns,ReturnsofSalesorIssuesandEnd-of-PeriodInventoryAdjustmentsTwo points were made earlier in relation to Inventory Cards:
■■ Returns are recorded at the same price per unit as the original transaction and recorded as negative entries in the same “Purchases/Receipts” or “Sales/Issues” section of the card where the original transaction was recorded relating to the return.
■■ At the end of the accounting period, a physical count will be made and an appropriate adjustment made to the balance on hand as per the Inventory Card. A loss adjustment under FIFO will be at the oldest stock value of current stock. Under Weighted Average, any adjustment will be at the current weighted average value.
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Advanced Example: Inventory Card using the FIFO method.
McAime Sales maintains a perpetual inventory system and has the following transactions for an item for June 2011.
01/06/11 Opening Balance 40 units @ $ 8.00
03/06/11 Sale 20 units
13/06/11 Purchase 80 units @ $ 9.00
15/06/11 Sale 40 units
22/06/11 Purchase Returns 20 units (Purchased 13/6/11)
25/06/11 Sales Returns 10 units ( Sold 15/6/11)
27/06/11 Purchase 40 units @ $ 10.00
28/06/11 Sale 25 units
30/06/11 Physical count 60 units
Required: Prepare an Inventory Card using FIFO.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 0 3
Solution: McAime Sales
Inventory Card – FIFO
DatePurchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $01/06/11 40 8.00 320
03/06/11 20 8.00 160 20 8.00 160
20 8.00 16013/06/11 80 9.00 720 80 9.00 720
100 88015/06/11 20 8.00 160
20 9.00 180 60 9.00 54040 340 60 9.00 540
22/06/11 – 20 9.00 – 180 40 9.00 36040 9.00 360
25/06/11 – 10 9.00* – 90 50 9.00 45050 9.00 450
27/06/11 40 10.00 400 50 9.00 45040 10.00 40090 850
28/06/11 25 9.00 225 25 9.00 22540 10.00 40065 625
Totals 100 940 80 635
30/06/11 Inventory Adjustment 5 9.00** 45 20 9.00 18040 10.00 40060 580
* The oldest inventory ($8/unit) is issued first, therefore the returns must be the latest inventory ($9/unit).
** The oldest inventory is issued first, therefore the loss must be the oldest inventory ($9/unit).
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 0 4 Chapter 8 • Inventory
Advanced Example: Inventory Card using the Weighted Average
Use the same data for McAime Sales as in the example for the FIFO method.
Required: Prepare an Inventory Card using the Weighted Average method.
Solution: McAime Sales
Inventory Card – Weighted Average
DatePurchases Sales Balance
Qty Unit Cost Value Qty Cost Unit Value Qty Unit Cost Value
$ $ $ $ $ $
01/06/11 40 8.000 320
03/06/11 20 8.000 160 20 8.000 160
13/06/11 80 9.00 720 100 8.800 880
15/06/11 40 8.800 352 60 8.800 528
22/06/11 – 20 9.00 – 180 40 8.700 348
25/06/11 – 10 8.800 – 88 50 8.720 436
27/06/11 40 10.00 400 90 9.289 836
28/06/11 25 9.289 232 65 9.292 604
Totals 100 940 75 656
30/06/11 Inventory Adjustment 5 9.292 46 60 9.300 558
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 0 5
Self-Testing Exercise 7
The inventory transactions of Elliott Ltd for May are as follows.
01/05/11 Opening Balance 1,000 @ $8.00
05/05/11 Purchases 600 @ $8.50
09/05/11 Sale 200
13/05/11 Purchase 600 @ $9.00
15/05/11 100 units (purchased 5/5) returned to supplier supplier
19/05/11 Sale 900
22/05/11 Sale 300
25/05/11 100 units (sold 19/5) returned by customer
27/05/11 Purchase 200 @ $9.50
30/05/11 Sale 600
31/05/11 Physical count 440
Required: Prepare Inventory Cards using:
(a) The FIFO method.
(b) The Weighted Average method.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 0 6 Chapter 8 • Inventory
Example
The inventory transactions of Charles Ltd for May are as follows.
Solution: Charles Ltd
(a) Inventory Card – Weighted Average
DatePurchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $
01/5/11 1,000 8.0000 8,000
05/5/11 600 8.50 5,100 1,600 8.1875 13,100
09/5/11 200 8.1875 1,638 1,400 8.1871 11,462
13/5/11 600 9.00 5,400 2,000 8.4310 16,862
15/5/11 – 100 8.50 – 850 1,900 8.4274 16,012
19/5/11 900 8.4274 7,585 1,000 8.4270 8,427
22/5/11 300 8.4270 2,528 700 8.4271 5,899
25/5/11 – 100 8.4274 – 843 800 8.4275 6,742
27/5/11 200 9.50 1,900 1,000 8.6420 8,642
30/5/11 600 8.6420 5,185 400 8.6425 3,457
Totals 1,300 11,550 1,900 16,093
31/5/11 Loss 40 8.6425 346 360 8.6417 3,111
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 0 7
(b) Inventory Card – FIFO
DatePurchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value$ $ $ $ $ $
01/5/11 1,000 8.00 8,000
1,000 8.00 8,00005/5/11 600 8.50 5,100 600 8.50 5,100
1,600 13,100
09/5/11 200 8.00 1,600 800 8.00 6,400 600 8.50 5,100
1,400 11,500
800 8.00 6,400600 8.50 5,100
13/5/11 600 9.00 5,400 600 9.00 5,4002,000 16,900
15/5/11 – 100 8.50 – 850 800 8.00 6,400500 8.50 4,250
600 9.00 5,4001,900 16,050
19/5/11 800 8.00 6,400 400 8.50 3,400100 8.50 850 600 9.00 5,400900 7,250 1,000 8,800
22/5/11 300 8.50 2,550 100 8.50 850600 9.00 5,400700 6,250
25/5/11 – 100 8.50 – 850 200 8.50 1,700600 9.00 5,400800 7,100
200 8.50 1,700600 9.00 5,400
27/5/11 200 9.50 1,900 200 9.50 1,9001,000 9,000
30/5/11 200 8.50 1,700 200 9.00 1,800400 9.00 3,600 200 9.50 1,900600 5,300 400 3,700
Totals 1,300 11,550 1,900 15,85031/5/11 Loss 40 9.00 360 160 9.00 1,440
200 9.50 1,900360 3,340
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 0 8 Chapter 8 • Inventory
Self-Testing Exercise 8
Dendon Ltd.’s record of purchases and issues of a raw material is as follows.
01/6/11 Inventory 800 tins at $12.00 each
04/6/11 Issued 200 tins
06/6/11 Received 400 tins at $13.00 per tin
08/6/11 Issued 700 tins
15/6/11 Returned to supplier 100 tins that were received on 6/6/07
19/6/11 Received 400 tins at $14.20 per tin
22/6/11 Returned to supplier 60 tins that were issued on 8/6/07
25/6/11 Issued 400 tins
27/6/11 Received 400 tins at $16.04 per tin
30/6/11 Stocktake 650 tins on hand
Required: Prepare an Inventory Card using the FIFO method.
Self-Testing Exercise 9
Required: Using the data provided in Self Testing Exercise 8, prepare an Inventory Card using the Weighted Average method.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 0 9
8.12 IncomeStatementswithInventory
There is a slight difference in the format of the Income Statements between the alternatives of a Periodic Inventory System or a Perpetual Inventory System.
Income Statement using the Periodic Inventory System
Income Statement for the year ended 30 June 2011
Sales xxx
Less: Cost of Goods Sold
Opening Inventory xx
Purchases xxx
xxx
Less: Closing Inventory * xx xxx
Gross Profit xxx
Less: Operating Expenses xxx
Net Profit xxx
* Closing Inventory as per physical inventory (stocktake) at 30 June.
Income Statement using the Perpetual Inventory System
Income Statement for the year ended 30 June 2011
Sales xxx
Less: Cost of Goods Sold ** xxx
Gross Profit xxx
Less: Operating Expenses xxx
Net Profit xxx
** Cost of Goods Sold from the Cost of Goods Sold account.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 1 0 Chapter 8 • Inventory
8.13 EffectofValueAssignedtoInventoryonProfitandBalanceSheet
Understatement or overstatement of the inventory value will have a direct effect on net profit and the financial position shown in the balance sheet. The impact of an incorrect inventory value can be summarised as:
Effect on Cost of Goods Sold
Effect on Net Profit
Overstated Understated
Overstatement of
Understatement of
{
{
Opening Inventory
Closing Inventory
Opening Inventory
Closing Inventory Overstated
Understated
Understated Overstated
Overstated
Understated
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 1 1
✶ Self-TestingExerciseSolutions
Solution 1
Jay Co – Inventory Schedule 30 June 2011
Item At Cost at NRV Value
A $ 1,000 $ 1,200 $ 1,000
B 1,000 850 850
C 800 650 650
D 1,600 1,800 1,600
E 2,000 3,000 2,000
F 600 500 500
Inventory Value 6,600
Solution 2
Colin Plate – Inventory Schedule at 31 May 2011
Date Item Cost Sold Inventory
01/05/11 Commodore CAT 123 $ 25,200 $ 25,200
Falcon – DOG 456 24,100 12/05
Corsair – RAT 789 23,000 23,000
10/05/11 Laser – HAY 101 23,600 20/05
15/05/11 Colt – OAT 202 22,100 22,100
Inventory Value 70,300
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 1 2 Chapter 8 • Inventory
Solution 3
F.I.F.O.
120 Items x $65 = $ 7,800
40 Items x $60 = 2,400
160 10,200
Inventory Value $10,200
Solution 4
Weighted Average
100 Items x $77 = $ 7,700
80 Items x $60 = 4,800
120 Items x $65 = 7,800
300 20,300
20,300 300
= $ 67.67
Inventory Value(160 x $67.67)
$ 10,827
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 1 3
Solution 5: Micro Productions
(a) Inventory Card – FIFO
Date Purchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $
01/06/11 60 6.00 360
04/06/11 100 6.20 620 100 6.20 620
160 980
10/06/11 40 6.00 240 20 6.00 120
100 6.20 620
120 740
17/06/11 20 6.00 120
20 6.20 124 80 6.20 496
40 244 80 6.20 496
80 6.20 496
18/06/11 100 6.35 635 100 6.35 635
180 1,131
24/06/11 40 6.20 248 40 6.20 248
100 6.35 635
140 883
Totals 200 1,255 120 732
(b)
30/06/11
Inventory Control 1,255 Cost of Goods Sold 732 Accounts Payable 1,255 Inventory Control 732 Purchases for June June Cost of Goods Sold transferred
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 1 4 Chapter 8 • Inventory
Solution 6: Micro Productions
(a) Inventory Card – Weighted Average
Date Purchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $
01/06/11 60 6.000 360
04/06/11 100 6.20 620 160 6.125 980
10/06/11 40 6.125 245 120 6.125 735
17/06/11 40 6.125 245 80 6.125 490
18/06/11 100 6.35 635 180 6.250 1,125
24/06/11 40 6.250 250 140 6.250 875
Totals 200 1,255 120 740
(b)
Inventory Control 1,255 Cost of Goods Sold 740 Accounts Payable 1,255 Inventory Control 740 Purchases for June June Cost of Goods Sold transferred
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 1 5
Solution 7: Elliott Ltd
(a) Inventory Card – FIFO
Date Purchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value$ $ $ $ $ $
01/05/11 1,000 8.00 8,00005/05/11 600 8.50 5,100 600 8.50 5,100
1,600 13,100
09/05/11 200 8.00 1,600 800 8.00 6,400 600 8.50 5,100
1,400 11,500
800 8.00 6,400600 8.50 5,100
13/05/11 600 9.00 5,400 600 9.00 5,4002,000 16,900
15/05/11 – 100 8.50 – 850 800 8.00 6,400500 8.50 4,250
600 9.00 5,4001,900 16,050
19/05/11 800 8.00 6,400 400 8.50 3,400100 8.50 850 600 9.00 5,400900 7,250 1,000 8,800
22/05/11 300 8.50 2,550 100 8.50 850600 9.00 5,400700 6,250
25/05/11 – 100 8.50 – 850 200 8.50 1,700600 9.00 5,400800 7,100
200 8.50 1,700600 9.00 5,400
27/05/11 200 9.50 1,900 200 9.50 1,9001,000 9,000
30/05/11 200 8.50 1,700 200 9.00 1,800400 9.00 3,600 200 9.50 1,900
600 5,300 400 3,700Totals 1,300 11,550 1,900 15,850
31/05/11 Inventory Adjustment 40 9.50 380 200 9.00 1,800240 9.50 2,280440 4,080
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 1 6 Chapter 8 • Inventory
(b) Inventory Card – Weighted Average
Date Purchases Sales Balance
Qty Unit Value Qty Unit Value Qty Unit Value
$ $ $ $ $ $
01/05/11 1,000 8.0000 8,000
05/05/11 600 8.50 5,100 1,600 8.1875 13,100
09/05/11 200 8.1875 1,638 1,400 8.1871 11,462
13/05/11 600 9.00 5,400 2,000 8.4310 16,862
15/05/11 – 100 8.50 – 850 1,900 8.4274 16,012
19/05/11 900 8.4274 7,585 1,000 8.4270 8,427
22/05/11 300 8.4270 2,528 700 8.4271 5,899
25/05/11 – 100 8.4274 – 843 800 8.4275 6,742
27/05/11 200 9.50 1,900 1,000 8.6420 8,642
30/05/11 600 8.6420 5,185 400 8.6425 3,457
Totals 1,300 11,550 1,900 16,093
31/05/11 Inventory Adjustment 40 8.6425 346 440 8.6432 3,803
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 1 7
Solution 8: Dendon Ltd
Inventory Card – FIFO
Date Purchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $01/6/11 800 12.00 9,600
04/6/11 200 12.00 2,400 600 12.00 7,200
600 12.00 7,20006/6/11 400 13.00 5,200 400 13.00 5,200
1,000 12,400
08/6/11 600 12.00 7,200100 13.00 1,300 300 13.00 3,900700 8,500 300 3,900
15/6/11 – 100 13.00 – 1,300 200 13.00 2,600
200 13.00 2,60019/6/11 400 14.20 5,680 400 14.20 5,680
600 8,280
260 13.00 3,38022/6/11 – 60 13.00 – 780 400 14.20 5,680
660 9,060
25/6/11 260 13.00 3,380140 14.20 1,988 260 14.20 3,692400 5,368 260 3,692
260 14.20 3,69227/6/11 400 16.04 6,416 400 16.04 6,416
660 10,108Totals 1,100 15,996 1,240 15,488
250 14.20 3,55030/6/11 Loss 10 14.20 142 400 16.04 6,416
650 9,966
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 1 8 Chapter 8 • Inventory
Solution 9: Dendon Ltd
Inventory Card – Weighted Average
DatePurchases Sales Balance
Qty Unit Cost Value Qty Unit Cost Value Qty Unit Cost Value
$ $ $ $ $ $
01/6/11 800 12.00 9,600
04/6/11 200 12.00 2,400 600 12.00 7,200
06/6/11 400 13.00 5,200 1,000 12.40 12,400
08/6/11 700 12.40 8,680 300 12.40 3,720
15/6/11 – 100 13.00 – 1,300 200 12.10 2,420
19/6/11 400 14.20 5,680 600 13.50 8,100
22/6/11 – 60 12.40 – 744 660 13.40 8,844
25/6/11 400 13.40 5,360 260 13.40 3,484
27/6/11 400 16.04 6,416 660 15.00 9,900
Totals 1,100 15,996 1,240 15,696
30/6/11 Loss 10 15.00 150 650 15.00 9,750
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 1 9
ChapterReviewQuestions
1. Moby Link has a second-hand telephone trading business and had the following transactions during June 2011
01/06/11 Opening Inventory Cost
Vilaphone VIL90 $260
Zingaphone ZO101 $205
15/06/11 Purchased Laser L999 $180
20/06/11 Sold Zingaphone ZO101
25/06/11 Purchased Megavox M231 $420
30/06/11 Sold Laser L999
Required: Calculate the value of inventory at 30 June 2011 using the specific identification method.
2. Artie Trader sells paintings using the specific identification method to trace inventory. Each painting purchased is tagged with a unique acquisition number. The following are Artie Trader’s transactions during July 2011:
01/07/11 Opening inventory Cost
# 21 Landscape $3,000
# 26 Portrait $2,000
# 28 Still Life $ 900
08/07/11 Purchased # 29 Seascape $1,500
12/07/11 Sold # 26 Portrait
24/07/11 Purchased # 30 Old Master $6,000
# 31 Impressionist $1,500
30/07/11 Sold # 28 Still Life
Sold # 31 Impressionist
Required: Calculate the value of inventory at 31 July 2011 using the specific identification method.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 2 0 Chapter 8 • Inventory
3. Periodic Inventory – FIFO Abbco had the following transactions for inventory for the month of June 2011:
01/06/11 Opening Inventory 20 units @ $ 4.50 $90
02/06/11 Purchase 40 units @ $ 5.00 $200
16/06/11 Purchase 40 units @ $ 5.50 $220
30/06/11 Purchase 40 units @ $ 4.50 $180
30/06/11 Closing Inventory 50 units
Required: Calculate the value of inventory at 30 June 2011 using FIFO for periodic inventory.
4. Periodic Inventory – FIFO with returns to supplier The inventory transactions of Ellicott for the month of July are as follows:
01/07/11 Opening Balance 400 units @ $ 1.50 $ 600
07/07/11 Purchase 400 units @ $ 1.50 $ 600
14/07/11 Purchase 400 units @ $ 1.60 $ 640
21/07/11 Returned to Supplier 200 units of 7 July purchase
28/07/11 Purchase 400 units @ $ 1.75 $ 700
A physical stocktake identified 600 units at 31 July 2011.
Required: Calculate the value of inventory at 31 July 2011 using FIFO for periodic inventory.
5. Periodic Inventory – FIFO with stock shortage Con Darlos determines the value of inventory using the periodic inventory
system using FIFO. The following information is provided:
01/08/11 Opening Balance 200 units @ $ 1.50 $ 300
07/08/11 Purchase 200 units @ $ 1.60 $ 320
14/08/11 Purchase 200 units @ $ 1.60 $ 320
21/08/11 Purchase 200 units @ $ 1.70 $ 340
28/08/11 Purchase 200 units @ $ 1.80 $ 360
700 units were recorded as sold during the month. A physical stocktake identified only 280 units at 31 August 2011.
Required: Calculate the value of inventory at 31 August 2011 using FIFO for periodic inventory.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 2 1
6. Periodic Inventory – Weighted Average Cost Cobb & Co records inventory using the periodic system at weighted average
cost and had the following transactions for June 2011:
01/06/11 Opening Inventory 40 units @ $ 10.00 $ 400
02/06/11 Purchase 80 units @ $ 9.00 $ 720
16/06/11 Purchase 80 units @ $ 11.00 $ 880
30/06/11 Purchase 40 units @ $ 10.00 $ 400
30/06/11 Closing Inventory 50 units
Required: Calculate the value of inventory at 30 June 2011.
7. Periodic Inventory – Weighted Average Cost with returns to supplier The inventory transactions of Costa for the month of July 2011 are as follows:
01/07/11 Opening Balance 400 units @ $ 1.50 $ 600
07/07/11 Purchase 400 units @ $ 1.50 $ 600
14/07/11 Purchase 400 units @ $ 1.60 $ 640
21/07/11 Returned to Supplier 200 units of 7 July purchase
28/07/11 Purchase 400 units @ $ 1.75 $ 700
A physical stocktake identified 600 units at 31 July 2011.
Required: Calculate the value of inventory at 31 July 2011 using the Weighted Average Cost method for the periodic inventory system.
8. Periodic Inventory – Weighted Average with stock shortage Cor Leone determines the value of inventory using the periodic inventory
system at weighted average cost. The following information is provided:
01/08/11 Opening Balance 200 units @ $ 1.50 $ 300
07/08/11 Purchase 200 units @ $ 1.60 $ 320
14/08/11 Purchase 200 units @ $ 1.60 $ 320
21/08/11 Purchase 200 units @ $ 1.75 $ 350
28/08/11 Purchase 200 units @ $ 1.80 $ 360
A physical stocktake identified only 280 units at 31 August 2011. 700 units were recorded as sold during the month.
Required: Calculate the value of inventory at 31 August 2011.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 2 2 Chapter 8 • Inventory
9. The beginning inventory and purchases for the year ended 30 June 2011 for Nassco were as follows:
Date Details Units Unit Cost Total Cost
July 1 Inventory 50 $ 8.90 $ 445.00
Sept 15 Purchases 300 10.75 3,225.00
Dec 16 Purchases 1,000 9.50 9,500.00
April 14 Purchases 700 10.50 7,350.00
June 21 Purchases 500 12.00 6,000.00
Total available for use 2,550 26,520.00
On 30 June, a physical count showed ending inventory at 700 units. Nassco uses the periodic inventory system.
Required: Calculate the value of ending inventory based on the following methods:
(a) FIFO.
(b) Weighted Average Cost.
10. A.D. & Company deals in a particular item of merchandise. Information describing balances on hand, purchases and sales of the product is given below for the year ended 31 December 2011.
2011 Quantities
Date Purchased Sold Balance Unit Cost ($) $
01 Jan 200 1.50 300
24 Jan 200 400 1.60 320
08 Feb 100 300
16 Mar 150 150
0l Jun 200 350 1.60 320
18 Aug 150 200
06 Sept 100 100
15 Oct 200 300 1.70 340
29 Dec 50 250
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 2 3
Required: If a periodic inventory system is used, calculate:
(a) the value of closing inventory; and
(b) the cost of goods sold;
for both the FIFO method and Weighted Average Cost method.
11. From the information below for Agent Fee, using the PERIODIC METHOD to record inventory, calculate:
(a) the value of closing inventory;
(b) the Cost of Goods Sold;
for both the FIFO method and Weighted Average Cost method.
On Hand July 1 100 units @ $ 7.50 $ 750.00
Purchases for July 4 600 units @ 7.75 4,650.00
16 300 units @ 8.00 2,400.00
27 400 units @ 8.50 3,400.00
1,400 11,200.00
Sales for July 6 160 units
12 180 units
19 160 units
22 120 units
29 180 units
800
Closing Inventory per stocktake = 600 units
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 2 4 Chapter 8 • Inventory
12. Happy Warrior Ltd uses a perpetual inventory system and provides the following information.
■■ On 1 December, beginning balance is 150 units costing $15 each, total cost $2,250.
■■ On 6 December, 150 units are purchased at $15.50 each, total cost $2,325.
■■ On 10 December, 180 units are sold.
■■ On 21 December, 150 units are purchased for $15.60 each, total cost $2,340.
■■ On 23 December, 100 units are sold.
Required: Complete an inventory card using the FIFO method for inventory valuation.
13. Stewart Ember Creations maintains inventory cards, using the perpetual inventory system, to record inventory movements and to value inventory.
The following information is provided for an item of inventory:
■■ On 1 June, beginning balance on hand is 400 units, costing $25 each.
■■ On 6 June, 200 units purchased at $26 each, total cost $5,200.
■■ On 7 June, 170 units sold.
■■ On 9 June, 20 units purchased on 6 June, were returned to the supplier.
■■ On 17 June, 130 units sold.
■■ On 23 June, 120 units purchased at $27 each, total cost $3,240.
■■ On 28 June, 160 units sold.
■■ On 30 June, 10 units sold on 17 June returned to store.
■■ A physical count of inventory at the 30 June identified 235 units on hand.
Required:
(a) An inventory ledger card using the Weighted Average Cost method.
(b) An inventory ledger card using the FIFO method.
(c) Journal entries for :
(i) Purchases.
(ii) Issues.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 2 5
14. The David John Company records its inventory movements using the perpetual inventory system and values inventory by the FIFO method.
The company has the following inventory transactions during June 2011:
01 June Opening balance 50 units at $10.00
08 June Purchase 40 units at $9.00
13 June Issue 30 units
22 June Purchase 40 units at $8.00
25 June Return to supplier 10 units (purchased 8 June)
27 June Issue 30 units
Required: Complete an inventory card for the item.
15. Office Supplies Ltd had the following transactions for model 19G printers during June 2011:
01/06/11 Opening balance: 10 printers at a cost of $600 each.
08/06/11 6 printers sold.
12/06/11 Purchased 8 printers at $700 each.
24/06/11 Sold 6 printers.
29/06/11 Purchased 8 printers at $750 each.
30/06/11 2 printers returned from the sale of 24 June.
Required: Prepare an inventory card using the FIFO method.
16. Prepare an Income Statement for the year ended 30 June 2011 under the periodic inventory system from the following records of Pool Ltd.
Purchases $ 97,600
Inventory 1 July 8,150
Inventory 30 June 10,940
Selling Expenses 27,040
Sales Revenue 143,200
Administration Expenses 9,800
Freight Inwards 1,892
Financial Expenses 1,200
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 2 6 Chapter 8 • Inventory
17. Prepare an Income Statement for the year ended 30 June 2011 under the perpetual inventory system from the following records of Loop Ltd.
Cost of Goods Sold $ 92,170
Inventory 30 June 10,940
Selling Expenses 27,040
Sales Revenue 143,200
Administration Expenses 9,800
Freight Inwards 1,892
Financial Expenses 1,200
18. Prepare general journal entries to record the following transactions for the businesses of Dopey and Grumpy. Both businesses use the periodic inventory system.
Dec 28 Dopey sold goods to Grumpy for $4,300. The goods had cost Dopey $3,400.
Jan 13 Dopey sold goods to Grumpy for $6,700. The goods had cost Dopey $2,200.
19. Prepare general journal entries to record the following transactions for the businesses of Huey and Dewey. Both businesses use the perpetual inventory system.
Feb 21 Huey sold goods to Dewey for $7,800. The goods cost Huey $6,900.
Mar 23 Huey sold goods to Dewey for $6,850. The goods cost Huey $4,260.
20. Prepare general journal entries to record the following transactions for the businesses of Daffy and Taffy. Daffy uses the perpetual inventory system but Taffy uses the periodic inventory system.
Apr 22 Daffy sold goods to Taffy for $8,800. The goods had cost Daffy $7,900.
May 25 Daffy sold goods to Taffy for $8,850. The goods had cost Daffy $6,260.
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS Chapter 8 • Inventory 6 2 7
21. Prepare an Income Statement for the year ended 30 June 2011 under the perpetual inventory system from the following records of Wentworth Ltd.
Cost of Goods Sold $ 99,710
Inventory 30 June 12,940
Selling Expenses 25,540
Sales Revenue 183,250
Administration Expenses 19,800
Customs Duty 3,992
Financial Expenses 1,800
Marketing Expenses 14,560
22. Prepare an Income Statement for the year ended 30 June 2011 under the periodic inventory system from the following records of Faceeeni Ltd.
Purchases $169,600
Inventory 1 July 18,150
Inventory 30 June 10,940
Selling Expenses 23,040
Sales Revenue 243,200
Administration Expenses 15 ,800
Freight Inwards 1,892
Freight Out 13,000
Financial Expenses 11,200
23. Exchris Ltd uses the perpetual inventory system. From the following account balances at 30 June 2011 calculate the value of Purchases for the period.
Sales Revenue $10,000
Cost of goods sold 8,000
Inventory 5,000
PREPARE FINANCIAL STATEMENTS & MAINTAIN ASSET AND INVENTORY RECORDS6 2 8
24. Gruff Ltd. uses the periodic inventory system. From the following account balances at 30 June 2011 calculate the value of Purchases for the period.
Freight In $ 1,000
Sales Revenue 30,000
Inventory 30/6/11 3,000
Inventory 01/7/10 4,000
Gross Profit 10,000