Question

Stevens Ltd is the leading retailer of Gym equipment. The following information occurred during May 2020. Stevens Ltd had an opening inventory balance of $8,400,000.

May:

1            Returned to the suppliers $80,000 of the opening inventory and received cash.

12          Purchased additional inventory on credit from the supplier for $12,000,000.

18          Sold inventory for $6,000,000 cash (Cost price to Stevens Ltd $2,400,000).

19          Paid the suppliers the account from 12 May.

31          The closing stocktake at year-end revealed an inventory balance of $17,800,000.

Required:

1. Record the above information for the month of May 2020 in the general journal using the perpetual inventory method. Narrations are not required. Ignore GST.

2. Record the above information for the month of May 2020 in the general journal using the physical inventory method. Narrations are not required. Ignore GST.

3. Present the Income Statement extract for Stevens Ltd using the periodic inventory method for the month ended 31 May 2020.

4. Briefly explain two advantages of the perpetual inventory method for Stevens Ltd.

Answer 1

a. Perpetual Inventory System

Date	Account Titles	Debit	Credit
May-01	Cash	$              80,000
	Inventory		$           80,000
May-12	Inventory	$       12,000,000
	Accounts Payable		$   12,000,000
May-18	Cash	$         6,000,000
	Sales Revenue		$     6,000,000
	Cost of Goods Sold	$         2,400,000
	Inventory		$     2,400,000
May-19	Accounts Payable	$       12,000,000
	Cash		$   12,000,000
May-31	Cost of Goods Sold	$            120,000
	Inventory		$        120,000

b. Physical Inventory System

Date	Account Titles	Debit	Credit
May-01	Cash	$              80,000
	Purchase Returns		$           80,000
May-12	Purchases	$       12,000,000
	Accounts Payable		$   12,000,000
May-18	Cash	$         6,000,000
	Sales Revenue		$     6,000,000
May-19	Accounts Payable	$       12,000,000
	Cash		$   12,000,000
May-31	Inventory, Ending	$       17,800,000
	Purchase Returns	$              80,000
	Cost of Goods Sold	$         2,520,000
	Inventory, Beginning		$     8,400,000
	Purchases		$   12,000,000

c.

Income Statement
Sales Revenue	$         6,000,000
Cost of Goods Sold	$         2,520,000
Gross Profit	$        3,480,000

d. Advantages of Perpetual Inventory Method

1. It reduces investment in material, since real time position of inventory is known at any point of time and excess inventory is not required to be kept due to lack of timely information as in physical inventory method.

2. Gives details of inventory on each date and helps in maintaining appropriate amount of stock and also helps in preventing stock out.