Question

 

A company that uses a perpetual inventory system made the following cash purchases and sales. There was no beginning inventory.

January 1:	Purchased 30 units at SAR11 per unit
February 5:	Purchased 30 units at SAR 13 per unit
March 16:	Sold 50 Units for SAR 15 per unit

A.Prepare general journal entries to record the March 16 sale using the

1. FIFO inventory valuation method.
2. LIFO inventory valuation method.
3. Weighted average valuation method.

B. What is the cost of goods sold and the gross margin for each method? (2Marks)

C. What is the bank reconciliation? why is it important for companies to prepare bank reconciliation periodically? (1Mark)

Answer 1

Requirement A:

FIFO
Date	Account Titles and Explanation	Debit	Credit
March 16	Cash	750
	Sales revenue [50 x 15]		750
	[To record cash sales]
	Cost of goods	590
	Inventory [30 x 11 + 20 x 13]		590
	[To record cost of goods sold]
LIFO
March 16	Cash	750
	Sales revenue [50 x 15]		750
	[To record cash sales]
	Cost of goods	610
	Inventory [30 x 13 + 20 x 11]		610
	[To record cost of goods sold]
Weighted average:
March 16	Cash	750
	Sales revenue [50 x 15]		750
	[To record cash sales]
	Cost of goods	600
	Inventory [50 x 12]		600
	[To record cost of goods sold]

*Weighted average cost per unit = Total cost ÷ No of units purchased = (330 + 390) ÷ 60 = 720 ÷ 60 = 12

Requirement B:

Cost of goods sold
FIFO	590
LIFO	610
Weighted average	600

Gross margin
FIFO	0.213
LIFO	0.187
Weighted average	0.200

*Gross margin = (Net sales - Cost of goods sold) ÷ Net sales

.

Requirement C:

Bank Reconciliation:

Bank reconciliation means any entries omitted by bank or any cash book they are adjusted or corrected the books of accounts when it is required. For example the cash received on the basis of credit, then the cash credited in the account but the creditor does not know about the credited amount he did not recorded in his books. Then the transaction can be adjusted in the cash books after knowing of creditor.

In a companies any transactions on the basis of credit, then the cash credited in the bank account but the creditor does not know about the credited amount he did not recorded in his books. Then the transaction can be adjusted in the cash books after knowing of creditor.

Therefore, every company to prepare bank reconciliation periodically, because of omitted amounts are recorded in their company records or books.