Question

Inventory

a) Natasha Burke provides you with the following information in respect of one of her inventory items:

1 March	Balance	55 units @ $40.00 unit
8 March	Sold	35 units @ $90.00 unit
15 March	Purchased	60 units @ $45.00 unit
22 March	Sold	55 units @ $95.00 unit
29 March	Purchased	40 units @ $50.00 unit
31 March	Stocktake	60 units on hand

Tasks  

i. Prepare inventory ledger cards for the inventory item using both the FIFO and weighted average methods. Round unit costs to the nearest cent.

ii. Show balances for the cost of goods sold, sales and gross profit under both the FIFO and weighted average methods.

b) Explain why Natasha Burke may use both a perpetual inventory system and a periodic system in her gift store.

Answer 1

AS per FIFO
			Purchase			Sales			Over all Balance
Date	Description	Ref	Units	Cost	Total	Units	Cost of goods sold	Total	Units	Cost	Total
1-Mar	Beg Balance		55	40	2200				55	40	2200
8-Mar	Sales				0	35	40	1400	20	40	800
15-Mar	Purchases		60	45	2700			0	80	20*40+60*45	3500
22-Mar	Sales				0	55	20*40+35*45	2375	25	45	1125
29-Mar	Purchases		40	50	2000			0	65	25*45+40*50	3125
31-Mar	Loss of stock/Theft					5	45	225	60	20*45+40*50	2900
Closing Stock Balance as per FIFO =			60 units of $2,900
Sales =
35*90+55*95	8,375
COGS	3,775	(1400+2375)	As per above table
Gross Profit	4,600
Net Profit	4,375	( 4600-225)

AS per Weighted Average

As Per Weighted Average
			Purchase			Sales
Date	Description	Ref	Units	Cost	Total	Units	Cost of goods sold	Total
1-Mar	Beg Balance		55	40	2200
8-Mar	Sales				0	35	44.52	1558.2
15-Mar	Purchases		60	45	2700			0
22-Mar	Sales				0	55	44.52	2375
29-Mar	Purchases		40	50	2000			0
31-Mar	Loss of stock/Theft					5	44.52	222.6
			155		6900
Average Cost	$	44.52	6900/155
Closing Stock Balance as per Weighted average =			60 units @44.52		2671.2
Sales =
35*90+55*95	8,375
COGS	3,933	(1558.2+2375)	As per above table
Gross Profit	4,442
Net Profit	4,219	( 4600-222.6)

Answer to 2 questions:

Maintaining the Inventory ledger is the sign of using the Perpetual Inventory system and taking stock count is the sign of following Periodic Inventory System.

here, in this case, the transactions in a month are recorded continuously in the inventory ledger card. This ledger maintains a beginning balance, against which are netted all receipts and uses of inventory. This approach works best in an environment where there is a considerable investment in inventory, and the inventory turns over regularly.

And Taking physical stock count as on last date. This approach works best in an environment where there is little inventory turnover and only a small investment in inventory.

Here if the transactions are voluminous than Natasha Burke should go for Perpetual Inventory system, however taking a stock count on the month end will improve the accuracy of the ledger as, in this case, there is difference of 5 units when compared to physical stock account than with ledger.