Question

Steven’s Stationery a well-known stationary store in town .The business maintains individual inventory records for each merchandise they are selling. The following information has been extracted from the records of Steven’s Stationery about one of its popular products. There are 50 units at the beginning of October costing $ 30 each. Date Purchase Date Sales October-09 100 units @ 28 October-11 100 units @ 50 October-17 70 units @ 27 October-15 20 units @ 50 October-25 80 units @ 26 October-29 110 units @ 50

Required:

a. Determine the cost of goods sold, ending inventory and gross profit for the month ended October, assume company opts FIFO as a cost flow assumption.

b. Assume Steve has an objective to save taxes, Keeping the price trends of purchases Do you think company has opted the right cost flow assumption? Why or why not.

c.Assume the value of ending inventory is mistakenly overstated by $ 500, how this error effects (over or understates) the following for the period

I.Cost of goods sold

II.Gross profit

d.Equity.Can we apply the idea of inventory shrinkage in this company? If yes record the inventory shrinkage assume a physical count indicates there are 80 units on hand on October 31.

Answer 1

a.

FIFO	Cost of Goods Available for sale			Cost of Goods Sold			Ending Balance
Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Beginning Inventory	50	$                  30.00	$          1,500	50	$         30.00	$         1,500
Purchases
October 09	100	$                  28.00	$          2,800	100	$         28.00	$         2,800
October 17	70	$                  27.00	$          1,890	70	$         27.00	$         1,890
October 25	80	$                  26.00	$          2,080	10	$         26.00	$            260	70	$         26.00	$         1,820
Total	300		$          8,270	230		$         6,450	70		$         1,820

Cost of Goods Sold = $6450
Ending Inventory = $1820
Gross Profit = 230 x $50 - 6450 = $5050

b.
The company has chosen right cost flow assumption of FIFO, since costs are decreasing and as per FIFO goods purchased at earliest are sold first which are at high rates, hence Income will be lower and lower taxes.

c.
i) Cost of Goods Sold will be understated by $500
ii) Gross Profit will be overstated by $500
iii) Equity will be overstated by $500

d. Inventory shrinkage cannot be applied here, since physical count is more than inventory as per inventory records.