Question

Retail operations and retail inventory Spottie Ltd began business on 1 January 2018. The business will sell ‘Spot the dog’ soft toys via an online store. The business is not registered for GST. The following transactions occurred during January 2018: Date: Details: 1 Jan Spottie Ltd issued 10,000 x $2 shares to Mr Spot and Mrs Spot. $20,000 received from the share issue was deposited into the business bank account. 3 Jan Inventory purchase (400 soft toys) from Plush Toys Ltd on account for $2,400 on terms of n/30. 6 Jan Sale of inventory (160 soft toys) to Rainbow Preschool on account for $1,600 on terms of n/30. 9 Jan Inventory purchase (300 soft toys) from Plush Toys Ltd via EFT for $2,100. 12 Jan Paid Plush Toys Ltd for purchases made on 3 January, via EFT. 15 Jan Received $1,600 from Rainbow Preschool in payment of their account. 20 Jan Sale of inventory (200 soft toys) to Sydney Children’s Hospital for $2,000 on terms of n/30. 22 Jan Inventory purchase (150 soft toys) from Plush Toys Ltd on account for $1,050 on terms of 2/10, n/30. 24 Jan Paid Plush Toys Ltd for purchases made on 22 January, via EFT. 25 Jan Sale of inventory (200 soft toys) for $2,400 to online customers, with customers paying via EFT. 31 Jan Mr & Mrs Spot completed a stocktake, and the number of soft toys on hand was 290. Required: i) Mr and Mrs Spot have heard of the two inventory methods – periodic and perpetual methods, and they have also heard of the terms ‘First-in-first-out’ and ‘Weighted average cost’, but don’t really know anything more about them. Prepare a memo to Mr and Mrs Spot explaining each of these methods/terms. ii) After Mr and Mrs Spot received your memo above, they both agree that the ‘First-in-first-out’ method suits their business. They are still undecided about which inventory method should be used (either the perpetual or periodic methods), and have asked you to prepare journal entries for all of the company’s transactions for January using the two different methods (using the ‘First-in-first-out’ basis), so that they can see how the journal entries differ. Show workings where necessary.

Answer 1

Answer (I)

Explanation of two inventory methods:

Occasional strategy: In this technique, the stock esteem can't be resolved straightforwardly by taking a gander at the books of records. The stock record remains a steady figure until the stock esteem is resolved toward the finish of a period (as a rule once per year, or a quarter or a month). Then all the stock buy developments are recorded in buys record and deals are recorded in deals account. Thus the term intermittent, since the stock sum is resolved occasionally either as a gauge or via completing physical stock check together with the utilization of a cost stream presumption - FIFO/Weighted Average

Ceaseless strategy: In this technique, the stock esteem can be resolved straightforwardly by investigating the books of record or record. The stock record changes unendingly with every exchange posting and posting happens in stock records and cost of merchandise sold record. All the stock related postings are promptly affected in the stock records and subsequently the term unending. The esteem is resolved dependent on the cost stream supposition - FIFO/Weighted Average and may require a physical stock to make any stock rectifications.

Stock flow terms:

First in First out Stock: This stock stream implies that the stock which came in first will initially move out or will be devoured first. It is increasingly material to enterprises where the stock close by can be recognized by date and the one which came in first should be expended first else they may lapse after some time. For eg: In a potato chips manufacturing plant, potatoes will be kept up in potato parts and the potatoes which came in before will be devoured first else they may ruin. The sums for merchandise issue is additionally taken as needs be and the old rates are connected for old stock amount issued. The stock which stays close by are esteemed a most recent rates, since the old stock with old rates are expended.

Weighted Average: This stock stream implies that the stock which came in first or which came in last can't be resolved and a weighted normal cost should be resolved for the blended stock. It is increasingly material to businesses where the new stock must be blended with the old stock and can't be kept separate from one another. For eg: In an assembling unit, the old oil gets blended with the new oil, since the generation is going on constantly and the materials are ceaselessly moving. Subsequently a blended rate or a weighted normal rate is determined for the blended stock and in like manner stock development is represented.

Answer (ii)

If you don't mind see the whole diary section graph, one next to the other for simple comprehension and an unmistakable idea. Every single required estimation have been given in exchanges. Likewise for interminable stock, the stock running equalization is appeared, so the idea is perfectly clear.

												Balance inventory
	Periodic Inventory system						Perpetual inventory system					Qty	Rate	Amount
1-Jan-18	Bank	Dr	20000			1-Jan-18	Bank	Dr	20000
	Share Capital	Cr		20000			Share Capital	Cr		20000
3-Jan-18	Purchases account	Dr	2400			3-Jan-18	Inventory of toys (400 x 6)	Dr	2400			400	6	2400
	Plush Toys Ltd	Cr		2400			Plush Toys Ltd	Cr		2400
3-Jan-18	Rainbow Preschool	Dr	1600			3-Jan-18	Rainbow Preschool	Dr	1600
	Sales Account	Cr		1600			Sales Account	Cr		1600
							Cost of Goods Sold (160x6)	Dr	960			240	6	1440
							Inventory of toys	Cr		960
9-Jan-18	Purchases account	Dr	2100			9-Jan-18	Inventory of toys (300 x 7)	Dr	2100			240	6	1440
	Bank	Cr		2100			Plush Toys Ltd	Cr		2100		300	7	2100
12-Jan-18	Plush Toys Ltd	Dr	2400			12-Jan-18	Plush Toys Ltd	Dr	2400
	Bank	Cr		2400			Bank	Cr		2400
15-Jan-18	Bank	Dr	1600			15-Jan-18	Bank	Dr	1600
	Rainbow Preschool	Cr		1600			Rainbow Preschool	Cr		1600
20-Jan-18	Sydney Chilren Hospital	Dr	2000			20-Jan-18	Sydney Chilren Hospital	Dr	2000
	Sales Account	Cr.		2000			Sales Account	Cr.		2000
							Cost of Goods Sold (200x6)	Dr	1200			40	6	240
							Inventory of toys	Cr		1200		300	7	2100
22-Jan-18	Purchases account	Dr	1050			22-Jan-18	Inventory of toys (150 x 7)	Dr	1050			40	6	240
	Plush Toys Ltd	Cr		1050			Plush Toys Ltd	Cr		1050		300	7	2100
												150	7	1050
24-Jan-18	Plush Toys Ltd	Dr	1050			24-Jan-18	Plush Toys Ltd	Dr	1050			40	6	240
	Bank	Cr		1029			Bank	Cr		1029		300	7	2100
	Cash Discount	Cr		21			Inventory of toys	Cr		21		150	6.86	1029	disc adjusted
25-Jan-18	Bank	Dr	2400			25-Jan-18	Bank	Dr	2400
	Sales Account	Cr		2400			Sales Account	Cr		2400
							Cost of Goods Sold (40x6+160x7)	Dr	1360			140	7	980
							Inventory of toys	Cr		1360		150	6.86	1029
												290		2009
31-Jan-18	Stock in hand	Dr	2009			31-Jan-18	No entry required, since no
	Cost of Goods Sold (Balance figure)	Dr	3520				change in physical stock as
	Cash Discount	Dr	21				compared to book stock
	Purchases A/c	Cr		5550