Exam #1B

Question 4:

(1) Perpetual
    Sales Returns and Allowances        825
            AR B. Black                        825
    Inventory                           500
            COGS                               500

(2) Periodic
    Sales Returns and Allowances        825
            AR B. Black                        825

PART B:
LIFO closing stock: 13*15000 + 18000 = $213 000
2) FIFO closing 9*21000 + 5*20000 = $289000
3) FIFO's margin is greater by $76000
 
 

Exam #2A

Question 3

1) Perpetual requires record keeping for each stock transaction, such as quantity on hand. Periodic does not, so periodic is cheaper to implement.
2) Book-keeping differences: Perpetual has a COGS account, and and the inventory account is regularly updated during the accounting period. Periodic does not have a COGS account and the inventory account only has journal entries during the closing process. Vice versa for the Purchases account.
3) The perpetual system has much better internal control, since any difference between the ledger value of stock and the stock take must be due to errors in transaction recording.
The periodic system can not reveal such errors.

(B)
i) Lower-of-cost or market is an application of the conservatism principle. Stock is recorded in the books at the historical cost (purchase price) unless the market value of those goods is lower.
(NOTE: This presumably means that LIFO inventory valuation at a time of declining prices is not allowed, since LIFO values the oldest stock, which now has a lower replacement cost than its historical cost)
 ii) FIFO costing method: First In First Out: stock is valued as if the oldest stock was the first to be sold.
iii) Mark-up vs gross profit
Mark-up gives the selling price based on the cost -- a mark-up of x% means the selling price is (1 + x/100) * cost.
Gross profit is the difference between sales and cost. As a percentage, it is (sales - cost)/sales.
Therefore, a 10% markup is a 9.09% gross profit.
(iv) Net price method: assumes the invoice discount for early payment will be taken, and therefore credits AP with the after-discount invoice value.
(C)
i) Perpetual, FIFO
Initial on-hand: 11@62
Sold 8, on hand = 3@62
Purchased 9, on hand = 3@62 + 9 @58
Purchased 12, on hand = 3@62 + 9@58 + 12@66
Sold 7, sold 6 on hand = 11@ 66
Closing stock: $726
ii) Perpetual, LIFO
Initial on-hand: 11@62
Sold 8, on hand = 3@62
Purchased 9, on hand = 3@62 + 9 @58
Purchased 12, on hand = 3@62 + 9@58 + 12@66
Sold 7, on hand = 3@62 + 9@58 + 5@ 66
sold 6 on hand = 3@62 + 8@58
Closing stock: $650

iii) Periodic, FIFO: ending $726
iv) Periodic, LIFO: 11@62 = $682

(D)
Gross Price Method
i) Within discount
purchase:     Inventory        20000
                    AP                20000
payment:      AP               20000
                    Cash              19200
                    Inventory           800

ii) After discount
 purchase:    Inventory        20000
                    AP                20000
payment       AP               20000
                    Cash              20000

Net Price Method
i) within discount
purchase:        Inventory     19200
                     AP                19200
payment:         AP            19200
                      Cash             19200
ii) after discount
purchase:        Inventory     19200
                     AP                19200
payment:         AP            19200
                 Inventory       800
                     Cash              20000

Exam #3A

(B) i) Trade discount: A discount not reflected in the book-keeping, because it is assumed (example: a retailer will always purchase stock for less than the list price partly because of the quantities purchased; this discount is the trade discount). Also known as the quantity discount.
ii) discount allowed (sales): a special discount granted by the seller, usually due to quality problems with the sold merchandise.
iii) lower of cost or net realisable value: rule for the cost used in reporting inventory. Net realisable value is the market value - selling costs, and if this value is lower than the historical cost, it must be used instead of the historical cost in accordance with the conservatism principle of accounting.
iv) stock loss (inventory loss): when a stock take reveals loss stock than the ledger value of stock, the difference is stock loss. Not easily detectable in the periodic system

(C)
Weighted average
 

Opening	10 @ 70	700
Purchased	9 @ 72	648
Purchases	6@74	444
TOTAL available to sell	25	1792
Sold	20

 

i) Average cost: $71.68
Value of closing stock:  5 * 71.68 = $358.40
COGS: 1792 - 358.40 = $1433.60

ii) Perpetual, FIFO
May 1    on hand    10@70
May 4    on hand    5@70
May 12,19  on hand    5@70 + 9@72 + 6@74
May 21    on hand 6@72 + 6@74
May 24    on hand 5@74
value of closing stock: $370
COGS = 1792 - 370 = $1422

iii) Using the example above:
Income from FIFO is net sales (say $2000) - COGS = $578

COGS under LIFO: closing stock is $350, so COGS = 1792 - $350 = $1442.
For the same sales, income would we only $558.
This demonstrates that LIFO reports lower imcome when prices are rising. Australia has had fairly high inflation historically. Therefore, LIFO would result in lower incomes and less taxation revenue, for the same sales activity, than FIFO costing.

(D)
i) Cost to retail? The ratio of beginning inventory is different to retail, so best to average it
(160000+240000)/(200000 + 400000) = 0.67
ii) Ending = opening + purchases - sales = 200000 + 400000 - 540000 = 60000
iii) Ending inventory at cost/60000 = 0.67, so  ending inventory is $40200
 

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