Question

statement Elements un AP7-2 ecords of Seema Companyia Reporting the Effects of Inventory Costing Methods on Financial Stateme Evaluating Inventory Management (P7-5) The following details were extracted on November 30, 2017, from the records of a specific product: Date Quantity Unit Cost Unit Sale Price Beginning inventory, January 1 300 $ 9 Purchase, February 10 400 10 Sale, April 7 300 $15 Purchase, August 20 300 Sale, November 29 350 16 ca On December 21, 2017, Seema sold 200 units to a customer at $18 per unit. Assume that the compem uses a perpetual inventory system and that its fiscal year ends on December 31, 2017 Required: 1. Which inventory costing method does Seema use? Explain. 2. Prepare the journal entries to record the purchase transaction on August 20 and the sale transaction on December 21, assuming that both are cash transactions. 3. Compute the inventory turnover ratio during 2017, and briefly explain what the amount 4. Assume that the demand for this product slowed down during December 2017, and is realizable value dropped to $9.5 per unit at December 31, 2017. Seema reports 15 cm at the LC&NRV. Prepare the journal entry that should be recorded at December 5. Compute the cost of sales for 2017, assuming for this part only that Seema uses average cost method. ma reports its ending inventory y that Seema uses the weighted

Answer 1

Answer:

1. Seema used FIFO method of Costing.

The FIFO (first-in, first-out) method of inventory costing assumes that the costs of the first goods purchased are those charged to cost of goods sold when the company actually sells goods. This method assumes the first goods purchased are the first goods sold.

In this quest Sales on 7th April mentioned the unit cost of $9 . Which assumes cost of the firs goods purchased charged to cost of goods sold

2. Journal Entries.

Date	Particulars	Debit	Credit
Aug-20	Inventory Account……………….Dr	3,300.00
	To Cash		3,300.00
	(Being the purchase of 300 Qty at unit cost of $11 per unit)
Dec-21	Cash Account……………Dr	3,600.00
	To Sales		3,600.00
	(Being the sale of 200 Qty at the sales price of 18 per unit)
Dec-21	Cost of Sales Account ……………..Dr	2,150.00
	To Inventory		2,150.00
	(Being the cost of goods sold charges as per FIFO Method, ie 50*10+150*11)

3. Inventory Turnover Ratio.

Inventory Turnover Ratio = Cost of Goods sold / Average Stock
Cost of Good Sold = 8,350
	Particulars	Qty	Unit Cost	Amount
	Sales, April 7	300.00	9.00	2,700.00
	Sales Nov 29	350.00	10.00	3,500.00
	Sales Dec 21	50.00	10.00	500.00
	Sales Dec 21	150.00	11.00	1,650.00
	Cost of Goods Sold			8,350.00
	Average Stock = (Beginning Stock + Closing Stock) /2
	Beginning Stock = 2,700
	Closing Stock = 1,650
	Average Stock = (2700+1650)/2	2,175.00
	Inventory Turn over ratio = 8350 / 2175 =	3.84

Inventory turnover is a ratio that showing how many times a company has sold and replaced inventory during a given period.

4.

Inventory is valued at lower of cost or net realizable value
According to cost method , Inventory value = 150*11 = 1650
According to NRV Inventory value = 150*9.5 = 1,425
Loss on valuation = 1650-1425 = 225

Journal Entry.

Date	Particulars	Debit	Credit
Dec 31st	Loss on inventory Valuation……….Dr	225.00
	To Inventory		225.00
	(Being the adjustment of stock valuation)

5.

Weighted Average cost per unit = Total cost of inventory / Total Qty
ie = 10,000 / 1000 = 10 per unit
Cost of sales of 850 units = 850 *10 = 8,500/-

Working Note:

Calculation under FIFO
Particulars	QTY	PRICE	AMOUNT
Beginning inventory	300.00	$            9.00	$        2,700.00
Purchase February 10	400.00	$         10.00	$        4,000.00
Purchase August 20	300.00	$         11.00	$        3,300.00
Closing Inventory ( 400+500+300-700)			$                     -
Sales, April 7	300.00	9.00	2,700.00
Sales Nov 29	350.00	10.00	3,500.00
Sales Dec 21	50.00	10.00	500.00
Sales Dec 21	150.00	11.00	1,650.00
	150.00
Cost of Goods Sold	FIFO
	QTY	COST	AMOUNT
	300.00	9.00	2,700.00
	350.00	10.00	3,500.00
	50.00	10.00	500.00
	150.00	11.00	1,650.00
			-
	Total		8,350.00
Closing Inventory	QTY	COST	AMOUNT
	150.00	11.00	1,650.00
	-	-	-
Value of closing inventory under FIFO Method	-		1,650.00