Question

Suppose you have business of laptops under the same brand “PAPA’s” (i.e) “PAPA’s Computer Store” and following transactions show purchases and sales of laptops during September: Sep. 1: Balance on hand, 30 laptops having cost $60 each. Sep. 4: Purchased 20 laptops at a cost $62 each on account. Sep. 8: Sold 35 laptops at sale price $80 each on cash. Sep. 9: Purchased 25 laptops at cost $65 each on cash. (3) Sep. 15: Purchased 40 laptops at cost $65 each on credit. Sep. 20: Sold 55 laptops at sale price $90 each on credit. Sep. 25: Purchased 35 laptops at cost $70 each on cash Sep. 28: Sold 15 laptops at sale price $100 each on credit. Sep. 30: Sold 25 laptops at sale price $115 each on cash. Instructions: a. If you are following perpetual inventory system, how will you prepare inventory subsidiary ledger if you have planned to avail financing of $250,000 from Azizi Bank this year? b. If you don’t have any plan to take financing but have intentions to save taxes then how will you prepare inventory subsidiary ledger.

Answer 1

A. Prepare inventory subsidiary ledger if you have planned to avail financing of $250,000 from Azizi Bank this year?

.

To avail loan, should prepare inventory ledger report under FIFO (first in first out ) method of cost flow assumption to show higher net income in the statements. Because under FIFO, gross profit will be higher in normal situations. Because, lower price items cost are assigned to cost of goods sold. We need to show higher income in statement to avail easy of getting finance.

.

Inventory ledger - FIFO method

.	.	Purchase			sales			Balance		.
Date	Description	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
Sep. 1	Beginning inventory							30	$60	$1800
4	Purchase	20	$62	$1240				30	$60	1800
								20	62	1240
8	Sales				-30	$60	1800
8	Sales				-5	$62	310	15	62	930
9	Purchase	25	65	1625				15	62	930
								25	65	1625
15	Purchase	40	65	2600				15	62	930
								65	65	4225
20	Sales				-15	62	930
					-40	65	2600	25	65	1625
25	Purchase	35	70	2450				25	65	1625
								35	70	2450
28	Sales				-15	65	975	10	65	650
								35	70	2450
30	Sales				-10	65	650
					-15	70	1050	20	70	1400
	balance				130		$8315	20		$1400

..

Total units available for sales = 30 + 20 + 25 + 40 + 35 = 150 units

Total cost of inventory available for sales = Beginning + purchase = 1800 + 1240 + 1625 + 2600 + 2450 = $9715

.

Ending inventory Balance = 20 units @ cost $70, total $1400

.

Cost of good sold = .Total cost of inventory available for sales - Ending inventory Balance = 9715 - 1400 = $8315

.

Total sales revenue = $12125 ( 35 * 80+ 55 * 90 + 15 * 100 + 25 * 115 )

Less: cost of goods sold = $8315

.

Gross profit = 12125 - 8315 =$3810

.

.

B. If you don’t have any plan to take financing but have intentions to save taxes then how will you prepare inventory subsidiary ledger.

.

To save taxes, should prepare under LIFO (Last in first out ) method of cost flow assumption to show lower net income. Because under FIFO, gross profit will be lower in normal situations. Because higher cost are assigned to cost of goods sold.

.

Inventory ledger - LIFO method

.	.	Purchase			sales			Balance		.
Date	Description	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
Sep. 1	Beginning inventory							30	$60	$1800
4	Purchase	20	$62	$1240				30	$60	1800
								20	62	1240
8	Sales				-20	$62	1240
8	Sales				-15	$60	900	15	60	900
9	Purchase	25	65	1625				15	60	900
								25	65	1625
15	Purchase	40	65	2600				15	60	900
								65	65	4225
20	Sales				-55	65	3575	15	60	900
								10	65	650
25	Purchase	35	70	2450				15	60	900
								10	65	650
								35	70	2450
28	Sales				-15	70	1050	15	60	900
								10	65	650
								20	70	1400
30	Sales				-20	70	1400
					-5	65	325	15	60	900
								5	65	325
	balance				130		$8490	20		$1225

.

Total units available for sales = 30 + 20 + 25 + 40 + 35 = 150 units

Total cost of inventory available for sales = Beginning + purchase = 1800 + 1240 + 1625 + 2600 + 2450 = $9715

.

Ending inventory Balance = 20 units 5 @ cost $65 and 10 @ cost $60, total $1225

.

Cost of good sold = .Total cost of inventory available for sales - Ending inventory Balance = 9715 - 1225= $8490

.

Total sales revenue = $12125

Less: cost of goods sold = $8490

.

Gross profit = $12125 - $8490 =$3635