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ACCT2043 Principles of Accounting I
Assignment 3 Question 1 1. Assuming that the James Company uses a perpetual inventory system and gross method, prepare general journal entries and period-end adjusting general entries for the above transaction. Show the necessary calculation process. Answer
October 12: Asset (Inventory) $22,000 Liability (Accounts Payable) $22,000 To record the purchase of goods on account.
Inventory (Asset) $500 Cash (Asset) $500, to document the payment of freight charges.
October 21: Accounts Payable (Liability) $22000 Inventory (Asset) $440 ([$22000 0. 02]) Cash (Asset) $21,560 ($[22,000 - ($22,000 -$440)). 02]), to document the payment for the goods that were bought on October 12, considering the discount.
October 22: Accounts Receivable (Asset) $28,000 Sales Revenue (R) $28,000 To record the sale of merchandise on account.
Cost of Goods Sold (Expense) $18,000 Inventory (Asset) $18,000 For the cost of goods sold.
Adjusting Entry for Inventory at the end of October: Cost of Goods Sold (Expense) $9,000 ([$15,000 + $22,000] - $28,000) Inventory (Asset) $9,000 To adjust inventory to its ending balance based on physical count.
Beginning Inventory: $15,000
Plus: October purchase amount: $22,000.
Equals: Sale goods: $15,000 + $22,000 = $37,000.
Minus: Cost of Goods Sold (from the sale): $28,000
Ending Inventory: $37,000-$28,000= $9,000.
. (16 marks) 2. (a) What are the main benefits of using perpetual inventory system over period system? (2 marks)
Answer
Real-time Inventory Tracking: Continuously updating inventory stock levels with each transaction, the last-in-first-out system provides real-time details on inventory levels. This enables enterprises to have correct and instantaneous data about their inventory any time.
Better Control and Management: Real-time tracking enables businesses to have better control over their inventory therefore, stockouts or overstock situations are avoided. This results in better inventory management processes and therefore enables companies to reduce their inventory levels in order meet customer demand without unnecessary inventory-holding costs.
Timely Decision Making: As perpetual inventory systems necessarily disclose current inventory data, businesses can take good and timely purchasing, production and sales decisions. The flexibility of the platform can help the business to quickly respond to any shifts in the demand patterns or supply blocks.
Accuracy in Financial Reporting: Inventory systems that are perpetual keep track of the cost of goods sold (COGS) precisely since inventory balances are real-time updating with each sale and purchase. This leads to the income statements and balance sheets that displays the accurate cost of goods sold and ending inventory.
Reduced Risk of Errors: As socks are being sold, the level of the inventory is automatically updated which reduces the risk of errors, like data entry mistakes or forgetting to update the inventory numbers. Thus, we are able to do more accurate records of inventory and decrease the possibility of mismatch between physical and recorded inventory levels.
Improved Customer Service: A business will benefit from faster and more accurate fulfillment of orders with instant stock information. This will have a positive impact on the level of customer satisfaction of companies. Inventory systems as they are normally perpetual not just help in preventing stockouts and backorders but also ensure that inventory levels are always updated.
(b) If James Company uses periodic system, does the company need to prepare adjusting journal entries for inventory shrinkage? Explain your answer. (2 marks)
Periodic inventory system does not involve a constant, period wise, updating of inventory balance. Differently, the cost of goods sold (COGS) and ending inventory is calculated in the regular manner often at the end of the accounting cycle through a physical count of current and forthcoming goods.
In the case of a periodic inventory system that James Company use and experiencing inventory shrinkage (the decrease in inventory due to reasons, such as missing, breakage, spoilage), the company normally does not prepare a special adjusting journal entry only for shrinkage control during the accounting period. The reason for this is that the periodic inventory system does not keep inventory transactions' records for every individual transaction; instead, a physical count at the end of the period used with prior records is applied to determine the cost of goods sold and the ending inventory. On the other hand, if the inventory losses are in principle and too high, it could be involved with the cost of goods sold and the assessment of the inventory valuation at the end of the accounting period. However, in such instances, the changes for inventory shrinkage will make its way in the computation of cost of goods sold and goods available for sales at the end of period by the physical count conducted.
Question 2 1. Determine the cost assigned to ending inventory and cost of goods sold using First-in, first out method (FIFO) in the following table. (8 marks) Answer FIFO Method:
Date Purchases Cost of Goods Sold Balance
Units Unit Cost Total November. 1 180 $16.000 $2,880.00 November. 5 140 $18.000 $2,520.00 November. 11 190 $20.000 $3,800.00 November. 26 160 $22.000 $3,520.00
Cost of Goods Sold:
150 units sold at the price of $16. 000 per unit (from Nov. 1) resulted in $2,400. 00
70X sold for $18. Pre-Electricity Bill for this period (Nov. 5 = $1,260. 00
The remaining 220 units were sold at the price of $20. $4,400 which is equivalent to 550 per unit (from Nov. 11)
2. Determine the cost assigned to ending inventory and cost of goods sold using Weighted average method in the following table. (8 marks) Answer Weighted Average Method: Date Purchases Cost of Goods Sold Balance Units Unit Cost Total November. 1 180 $16.000 $2,880.00 November. 5 140 $18.000 $2,520.00 November. 11 190 $20.000 $3,800.00 November. 26 160 $22.000 $3,520.00
Items Sold Cost:
150 units sold at $17. 714 (Nov. 1-5 weighted average) = $2,657.
10220 pieces sold for $18. Its 824 each (weighted average from Nov. 1, 5, and 11) = $4,181. 28
Last 150 items sold at $19. 448 each (weighted average) is $2,917. 20The total cost of goods sold is $9,755.
With 150 units still available priced at $19. 448 per (weighted average from all purchases), the total ending inventory is $2,917. 20. Therefore, using Weighted Average:
Cost of Goods Sold: $9,755. 58 Ending Inventory: $2,917. 20
3. If cost of gifts is decreasing in November due to reduced demand, analyze and contrast the impact of using the FIFO and weighted average inventory costing methods on the Income Statement and Statement of Financial Position. (4 marks)
Answer
In a scenario where the cost of gifts is going down in November because of the decreased demand, the decision between FIFO and Weighted Average inventory costing methods will affect both the Income Statement and the Statement of Financial Position. According to the LIFO method, the items sold were the most recent incoming sales, which on the one hand, caused lower Cost of Goods Sold (COGS) because newer, cheaper inventory replaced older, more expensive inventory. This result in a natural process of gross profit rates and possibly an increased net income because the revenue exceeds the original cost of goods sold. Moreover, the FIFO method of inventory valuation implies using the all older, lower costs, which leads to a higher total assets value on the balance sheet. Alternatively, the Weighted Average method spreads out the inventory costs this is done by an average of every items together what results is that COGS and ending inventory valuation will not be that high. Even though LIFO does not reveal a clearer trend in cost reduction in comparison with FIFO, it helps us to get a more profound view on income statement and balance sheet regarding measured values through time.
