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The company had 2000 units of a product at the end of 2016.These items were bought...

The company had 2000 units of a product at the end of 2016.These items were bought at K2 per unit.However, these items seem to be damaged and a total of K5,000 have to be spent for them to be sold at K4 each. The following transactions took place during the current period of January 2017 to June 2017. January Sold 1,500 units at K4 each. February received 10,000 units at K3.125 each less 20% trade discount March Sold 8,000 units at K4.00 each less 5% cash discount April Received 15,000 units at K2.70 each net of 20% trade discount May Received 6,500 units at K2.7 each net of 20% trade discount. June Sold 21,800 units at K4.00 each. June Returned 200 units to the supplier who supplied the goods in May Required:

Calculate the inventory valuation at 30th June 2017 using(i) FIFO Method (ii) LIFO method (iii) Average Cost Method. (b) Calculate the trading profit for the period under review using the above three methods of valuation of opening and closing inventory. (c) “Inventory is a graveyard of a business”. Discuss this statement (4Marks)

Solutions

Expert Solution

FIFO Method:

Receipts Issues Balance

Date Qty Rate amt Qty Rate amt Qty Rate amt

01.01.17 2000 2000 40,00,000

JAN 17 1500 4000 6000000

FEB 17 10,000 2500 2,50,00,000

MAR 17 500 2000 10,00,000

7500 2500 1,87,50,000

APR 17 15000 2700 4,05,00,000

MAY 17 6500 2700 1,75,50,000

JUNE 17 2500 2500 62,50,000

15000 2700 4,05,00,000

4300 2700 1,16,10,000

returns 200 2700 5,40,000

Balance 2000 2700 54,00,000

LIFO method

Receipts Issues Balance

Date Qty Rate amt Qty Rate amt Qty Rate amt

01.01.17 2000 2000 40,00,000

JAN 17 1500 4000 6000000

FEB 17 10,000 2500 2,50,00,000

MAR 17 8000 2500 2,00,00,000

APR 17 15000 2700 4,05,00,000

MAY 17 6500 2700 1,75,50,000

JUNE 17 6200 2700 1,67,40,000

  15000 2700 4,05,00,000

600 2500 15,00,000

Balance 1400 2500 35,00,000

500 2000 10,00,000

Average cost method

The average cost method is calculated by dividing the cost of goods in inventory by the total number of items available for sale.

Total purchase cost

1. 10000*2500= 2,50,00,000

2. 15000*2700= 4,05,00,000

3. 6500*2700 = 1,75,50,000

Total cost 8,30,50,000

Total units 31500

average cost   83050000/31500 = $2636.50

      Receipts Issues Balance

Date Qty Rate amt Qty Rate amt Qty Rate amt

01.01.17 2000 2000 40,00,000

31500 2636.50 83050000

31300 2636.50 8,25,22,450

200 2636.50 5,27,300

Inventory is a graveyard for a business because over investment in inventory is frequent cause of business failure for a business. It is important to control the stock by taking necessary measures like implementing Just-In-Time system which enables the supplier to supply the material directly to the shop floor. It can reduce the inventory holding cost and damage to the material in the store can be minimized. Processing the damaged materials can cause huge damage to the qualitative production that can result into the reduction of sales and revenue to the organization. So instead of piling up the stock in the store it is suggestable to implement proper material management system to reduce the stock holding cost and to reduce damage or deterioration to the materials

  

  

  

ekkarill92 answered 2 years ago
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