Solutions to GAAP: Graded Questions Inventories

Solution 13.7

Part A: Perpetual system

a) FIFO formula

INVENTORY
Date Description C Date Description C
01 Jan Balance b/d 0
01 Jan Bank (220 x C220) 48 400
03 Jan Bank (440 x C231) 101 640
10 Jan Cost of sales (220 x C220) 48 400
14 Jan Cost of sales (110 x C231) 25 410
Balance c/d 76 230
150 040 150 040
Balance b/d (330 x C231) 76 230
16 Jan Bank (110 x C236) 25 960
18 Jan Cost of sales (220 x C231) 50 820
Balance c/d 51 370
102 190 102 190
Balance b/d (220) 51 370
• Balance (1) (110 x C231) 25 410
• Balance (2) (110 x C236) 25 960
24 Jan Cost of sales (110 x C231) 25 410
Balance c/d 25 960
51 370 51 370
Balance b/d (110 x C236) 25 960
25 Jan Bank (660 x C249) 164 340
26 Jan Cost of sales 53 350
(110 x C236) + (110 x C249)
Balance c/d 136 950
190 300 190 300
Balance b/d (550 x C249) 136 950
27 Jan Cost of sales (330 x C249) 82 170
Balance c/d 54 780
136 950 136 950
Balance b/d (220 x C249) 54 780
28 Jan Bank (220 x C253) 55 660
29 Jan Bank (220 x C264) 58 080
31 Jan Cost of sales 82 610
(220 x C249) + (110 x C253)
Balance c/d 85 910
168 520 168 520
Balance b/d 85 910
• Balance (1) (110 x C253) 27 830
• Balance (2) (220 x C264) 58 080

Note:
• When using the FIFO formula, it is useful to balance our account after each sale.
• Our ledger account balances to 330 boxes (110 at C253 and 220 at C264). This agrees with our stock
count showing 330 boxes and thus there is no missing inventory and no further adjustment required
(notice: when using the perpetual system, we use our stock count to check our ledger balance).

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Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued

Part A: Perpetual system continued …

a) continued …

COST OF SALES
Date Description C Date Description C
10 Jan Inventory 48 400
14 Jan Inventory 25 410
18 Jan Inventory 50 820
24 Jan Inventory 25 410
26 Jan Inventory 53 350
27 Jan Inventory 82 170
31 Jan Inventory 82 610
Balance c/d 368 170
368 170 368 170
Balance b/d 368 170

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Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued

Part A: Perpetual system continued …

b) Weighted average (WA) formula

INVENTORY
Date Description C Date Description C
01 Jan Balance b/d 0.00
01 Jan Bank (220 x C220) 48 400.00
03 Jan Bank (440 x C231) 101 640.00
Balance c/d 150 040.00
150 040.00 150 040.00
Balance b/d 150 040.00
(660 x C227.33 Calc 1)
10 Jan Cost of sales (220 x C227.33) 50 013.33
14 Jan Cost of sales (110 x C227.33) 25 006.67
16 Jan Bank (110 x C236) 25 960.00
Balance c/d 100 980.00
176 000.00 176 000.00
Balance b/d 100 980.00
(440 x C229.50 Calc 2)
18 Jan Cost of sales (220 x C229.50) 50 490.00
24 Jan Cost of sales (110 x C229.50) 25 245.00
25 Jan Bank (660 x C249) 164 340.00
Balance c/d 189 585.00
265 320.00 265 320.00
Balance b/d 189 585.00
(770 x C246.21 Calc 3)
26 Jan Cost of sales (220 x C246.21) 54 167.14
27 Jan Cost of sales (330 x C246.21) 81 250.71
28 Jan Bank (220 x C253) 55 660.00
29 Jan Bank (220 x C264) 58 080.00
Balance c/d 167 907.15
303 325.00 303 325.00
Balance b/d 167 907.15
(660 x C254.40 Calc 4)
31 Jan Cost of sales (330 x C254.40) 83 953.57
Balance c/d 83 953.57
167 907.15 167 907.15
Balance b/d 83 953.57
(330 x C254.40)
Calculations:
1. C150 040 ÷ 660 boxes = C227.33/box
2. C100 980 ÷ 440 boxes = C229.50/box
3. C189 585 ÷ 770 boxes = C246.21/box
4. C167 907.15 ÷ 660 boxes = C254.40/box

Note:
• When using the WA formula, we calculate the cost of sales by multiplying the number of units sold by
the weighted average cost per unit.
• When we use the WA formula under the perpetual system, we recalculate the weighted average cost
per unit each and every time there is another purchase at a price per unit that differs from the previous
WA cost per unit. Thus, we balance our account after each new purchase.
• Our ledger account balances to 330 boxes (330 at C254.40). This agrees with our stock count showing
330 boxes and thus there is no missing inventory and no further adjustment required (notice: when
using the perpetual system, we use our stock count to check our ledger balance)

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Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued...

Part A: Perpetual system continued …

b) continued …

COST OF SALES
Date Description C Date Description C
10 Jan Inventory 50 013.33
14 Jan Inventory 25 006.67
18 Jan Inventory 50 490.00
24 Jan Inventory 25 245.00
26 Jan Inventory 54 167.14
27 Jan Inventory 81 250.71
31 Jan Inventory 83 953.58
Balance c/d 370 126.43
370 126.43 370 126.43
Balance b/d 370 126.43

Check:
Inventory balance: C83 953.57 + Cost of sales: 370 126.43 = Total purchases: C454 080.00

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Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued...

Part B: Periodic system

a) FIFO formula

INVENTORY
Date Description C Date Description C
01 Jan Balance b/d 0
31 Jan Cost of sales See stock count sched. 85 910
Balance c/d 85 910
85 910 85 910
31 Jan Balance b/d 85 910

PURCHASES
Date Description C Date Description C
01 Jan Bank (220 x C220) 48 400
03 Jan Bank (440 x C231) 101 640
16 Jan Bank (110 x C236) 25 960
25 Jan Bank (660 x C249) 164 340
28 Jan Bank (220 x C253) 55 660
29 Jan Bank (220 x C264) 58 080
Cost of sales 454 080
454 080 454 080

COST OF SALES
Date Description C Date Description C
31 Jan Purchases 454 080 31 Jan Inventory (c/b) Note 1 85 910
31 Jan Balance c/d 368 170
454 080 454 080
31 Jan Balance b/d 368 170

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Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued ...

Part B: Periodic system continued …

a) continued …

WORKINGS

STOCK COUNT SCHEDULE

Boxes C/ box C
Jan 31 Boxes counted (calc 1) 330
Valued at most recent prices
• purchase price on 29 Jan 220 C264 58 080 Note 2

• purchase price on 28 Jan 110 C253 27 830 Note 2

(330 boxes – 220 boxes)

C85 910

Calculations:

1. Total boxes purchased: 1 870 – Total boxes sold: 1 540 = 330 boxes left at month-end

Notes:

1 When using the periodic system, the value of the closing inventory is measured by first determining
the physical stock on hand (i.e. by counting the number of units on hand) and then multiplying the
number of units on hand by the relevant cost per unit. See stock count schedule above

2 When using the FIFO formula, the oldest inventory is considered to have been sold first (i.e. the
closing inventory is assumed to be the newest stock), so we use the cost per unit from the most recent
purchases and work backwards. Our closing inventory consists of 330 boxes.
• Our most recent purchase was 220 boxes at C264 per box and so we assume this is part of the
closing inventory: 220 x C264 = C58 080
• But we are still looking for the cost of another 110 boxes (stock count: 330 boxes – the
abovementioned most recent purchase: 220 boxes). Thus, we now look to the purchase
immediately prior to the most recent purchase, which was a purchase at C253 per box and thus we
assume this is part of the closing inventory: 110 x C253 = C27 830.

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Solution 13.7 continued

Part B: Periodic system continued …

b) Weighted average (WA) formula

INVENTORY
Date Description C Date Description C
01 Jan Balance b/d 0
31 Jan Cost of sales 80 131.76
See stock count sched. and Note 1
Balance c/d 80 131.76
80 131.76 80 131.76
31 Jan Balance b/d 80 131.76
See stock count sched. and Note 1

PURCHASES
Date Description C Date Description C
01 Jan Bank (220 x C220) 48 400
03 Jan Bank (440 x C231) 101 640
16 Jan Bank (110 x C236) 25 960
25 Jan Bank (660 x C249) 164 340
28 Jan Bank (220 x C253) 55 660
29 Jan Bank (220 x C264) 58 080
Cost of sales 454 080
454 080 454 080

COST OF SALES
Date Description C Date Description C
31 Jan Purchases 454 080.00 31 Jan Inventory (c/b) 80 131.76
See stock count sched. and Note 1

31 Jan Balance c/d 373 948.24

454 080.00 454 080.00
31 Jan Balance b/d 373 948.24

STOCK COUNT SCHEDULE

31 Jan Boxes counted (calculation 1) 330 boxes

WA cost per box C242.82

(Total cost of purchases: C454 080 ÷ Total boxes purchased: 1 870)

Value of closing inventory Note 1 C80 131.76

Calculations:
1. Total boxes purchased: 1 870 – Total boxes sold: 1 540 = 330 boxes left at month-end
Notes:
1. When using the periodic system, the closing inventory is measured by multiplying the stock on hand
by the relevant cost/s per unit.
2. When using the WA formula, the closing inventory is calculated by multiplying the number of boxes
on hand by the weighted average cost per unit.
3. When using the WA formula under the periodic system, we calculate the weighted average cost per
box only once – when the stock count is performed. Compare this to the use of the WA formula under
the perpetual system where we calculated a new weighted average cost per box each and every time a
new purchase occurred. This means that using the WA formula under the periodic system will result
in a cost of sales and an inventory closing balance that would differ from the cost of sales and
inventory closing balance if we had used the WA formula under the perpetual system.

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Solution 13.7 continued…

Part C

a) If a perpetual inventory system is used:

When using the perpetual inventory system, we are able to determine the number of units of
inventory that should be on hand simply by looking at our accounting records (inventory
ledger account). In this example, an examination of our inventory ledger account reveals that
there should be 330 units on hand (see Part A). Thus, when using the perpetual system, the
physical stock count simply acts as a check on this balance.

In Part C, we are told that the physical stock count reveals only 300 boxes of inventory on
hand. In this case, this thus means that 30 boxes have gone missing (possibly theft). As a
result, an adjustment to the inventory balance (currently showing 330 boxes) is required since
it would otherwise be overstated:
Units per stock count 300 Units
Units per inventory balance 330 Units
Units missing 30 Units

The inventory balance must be decreased to reflect that 30 units have gone missing. When
journalising the reduction in inventory, the contra entry must be to profit or loss as an expense
(credit inventory and debit inventory loss expense). The adjustment to account for the missing
units would be measured at C253 if the FIFO formula had been used or C254.40 if the WA
formula had been used (see Part A (a) and Part A (b), respectively):
• FIFO: 30 x C253 = C7 590
• WA: 30 x C254.40 = C7 632

The question only required a discussion and did not specify that journals were required and
thus the following journals are provided for your interest only:

Assuming a FIFO inventory costing formula is applied, the adjusting journal would be:

31 January 20X5 Debit Credit

Inventory loss (E) 30 x C253 7 590
Inventory (A) 7 590
Inventory loss: 30 missing units; 300 units on hand per
the stock count instead of 330 units that should be on
hand, per the accounting records: measured at a FIFO
cost of C253 – see inventory account in Part A (a)

Assuming a WA inventory costing formula is applied, the adjusting journal would be:

Debit Credit
Inventory loss (E) 30 x C254,40 7 632
Inventory (A) 7 632
Inventory loss: 30 missing units;300 units on hand per
the stock count instead of 330 units that should be on
hand, per the accounting records: measured at a WA cost
of C254,40 – see inventory account in Part A (b)

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Solution 13.7 continued…

Part C continued …

b) If a periodic inventory system is used:

When using the periodic inventory system, we are not able to determine the number of units of
inventory that should be on hand. Instead, it is the actual stock count that is used to determine our
inventory account’s closing balance – the stock count is thus not used to check the inventory
closing balance – it is the closing balance.

Thus, we would use the closing balance of 300 units to determine our closing balance and
balance back to the cost of sales adjustment.

This means that we would not know that 30 boxes were missing but would simply assume these
to have been sold. As a result, the cost of these 30 boxes would automatically be included in the
cost of sales expense account. No additional journal adjustment would thus be needed – the cost
of sales adjustment in Part B would simply be different.

When using the periodic system, the cost of sales would be higher than the cost of sales under the
perpetual system because the periodic system automatically includes the cost of the stolen
inventory in the cost of sales expense.

However, it should be noted that irrespective of whether the periodic system or the perpetual
system is used, the effect on profit will be the same. This is because the periodic system includes
the cost of the stolen inventory in the cost of sales expense whereas the perpetual system simply
allows the cost of stolen inventory to be accounted for as a separate expense to the cost of sales
expense.

The question required a discussion and did not specify that journals were required and thus the
calculations and journals provided on the next pages are provided for your interest only.

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Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued…

Part C continued …

b) Periodic system continued…

If we had used the FIFO formula:

If we had used the FIFO formula, the stock count schedule would have looked as follows (the
amounts that differ from Part B (a) have been highlighted):

STOCK COUNT SCHEDULE

Boxes C/ box C
Jan 31 Boxes counted (given) 300
Valued at most recent prices
• purchase price on 29 Jan 220 C264 58 080 Note 2

• purchase price on 28 Jan 80 C253 20 240 Note 2

(300 boxes – 220 boxes)

C78 320

If we had used the FIFO formula, the ledger accounts would thus have appeared as follows (the
amounts that differ from Part B (a) have been highlighted):

INVENTORY
Date Description C Date Description C
01 Jan Balance b/d 0
31 Jan Cost of sales See stock count sched. 78 320
Balance c/d 78 320
78 320 78 320
31 Jan Balance b/d 78 320

PURCHASES
Date Description C Date Description C
01 Jan Bank (220 x C220) 48 400
03 Jan Bank (440 x C231) 101 640
16 Jan Bank (110 x C236) 25 960
25 Jan Bank (660 x C249) 164 340
28 Jan Bank (220 x C253) 55 660
29 Jan Bank (220 x C264) 58 080
Cost of sales 454 080
454 080 454 080

COST OF SALES
Date Description C Date Description C
31 Jan Purchases 454 080 31 Jan Inventory (c/b) Note 1 78 320
31 Jan Balance c/d 375 760
454 080 454 080
31 Jan Balance b/d 375 760

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 Solutions to GAAP: Graded Questions Inventories

Solution 13.7 continued…

Part C continued …

b) Periodic system continued…

If we had used the WA formula:

If we had used the WA formula, the stock count schedule would have looked as follows (the
amounts that differ from Part B (b) have been highlighted below):

STOCK COUNT SCHEDULE

31 Jan Boxes counted (given) 300 boxes

WA cost per box C242.82

(Total cost of purchases: C454 080 ÷ Total boxes purchased: 1 870)

Value of closing inventory Note 1 C72 847.06

If we had used the WA formula, the ledger accounts would appear as follows (the amounts that
differ from Part B (a) have been highlighted):

INVENTORY
Date Description C Date Description C
01 Jan Balance b/d 0.00
31 Jan Cost of sales 72 847.06
See stock count sched. and Note 1
Balance c/d 72 847.06
72 847.06 72 847.06
31 Jan Balance b/d 72 847.06
See stock count sched. and Note 1

PURCHASES
Date Description C Date Description C
01 Jan Bank (220 x C220) 48 400
03 Jan Bank (440 x C231) 101 640
16 Jan Bank (110 x C236) 25 960
25 Jan Bank (660 x C249) 164 340
28 Jan Bank (220 x C253) 55 660
29 Jan Bank (220 x C264) 58 080
Cost of sales 454 080
454 080 454 080

COST OF SALES
Date Description C Date Description C
31 Jan Purchases 454 080.00 31 Jan Inventory (c/b) 72 847.06
See stock count sched. and Note 1

31 Jan Balance c/d 381 232.94

454 080.00 454 080.00
31 Jan Balance b/d 381 232.94

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