Question

Pearl Trade Ltd. has the following transactions for inventory of a facial soap during the accounting period to 31 December 2017.

Year 2017 Quantity Cost/quantity or Price/quantity 12 1 January Beginning 90 inventoi 17 Februar Purchase 140 20 26 Februar Purchase 14 110 Purchase 16 9 Ma 250 30 Sale 25 June 25 November Purchase 9 NovemberSale 19 90 25 31 December Closing Inventor

Additionally, the company received complaints from a few customers from 25 June 2017 who developed allergies after using the company’s soap.

Required:

1. Calculate the revenue, cost of goods sold for the year ended 31 December 2017 and detail the value of the closing inventory for each date in the table above, using the FIFO inventory cost flow assumption.

2. What should the cost of inventory include and exclude? Provide three examples of costs that are included and three of costs that are excluded from the cost of inventory.

3. If the cost of inventory is rising in the future, how do you expect the FIFO method to affect the company’s future profit and closing inventory relative to other inventory costing methods?

4. What is the appropriate accounting treatment to deal with the customers’ complaint? Note that the customer started a legal case.

Answer 1

FIFO		Inwards			Outwards			Balance
		Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount
Jan-01	Beginning Inventory							90	£     12.00	£    1,080.00
Feb-17	Purchase	140	£      8.00	£    1,120.00				90	£     12.00	£    1,080.00
								140	£       8.00	£    1,120.00
								230		£    2,200.00
Feb-26	Purchase	20	£   14.00	£        280.00				90	£     12.00	£    1,080.00
								140	£       8.00	£    1,120.00
								20	£     14.00	£        280.00
								250		£    2,480.00
May-09	Purchase	110	£   16.00	£    1,760.00				90	£     12.00	£    1,080.00
								140	£       8.00	£    1,120.00
								20	£     14.00	£        280.00
								110	£     16.00	£    1,760.00
								360		£    4,240.00
Jun-25	Sales				90	£     12.00	£    1,080.00
					140	£       8.00	£    1,120.00
					20	£     14.00	£       280.00	110	£     16.00	£    1,760.00
Nov-04	Purchase	30	£   19.00	£        570.00				110	£     16.00	£    1,760.00
								30	£     19.00	£        570.00
								140		£    2,330.00
Nov-09	Sales				90	£     16.00	£    1,440.00	20	£     16.00	£        320.00
								30	£     19.00	£        570.00
								50		£        890.00
	Total						£    3,920.00

	Revenue	Quantity	Unit Price	Amount
Jun-25	Sales	250	$      25.00	$    6,250.00
Nov-09	Sales	90	$      25.00	$    2,250.00
	Total			$    8,500.00

Cost of Goods Sold = £    3,920.00 (as shown above)

Costs to include in cost of inventory are Ordering Costs, holding Costs, shortage costs, non recoverable taxes, transportation
Costs that are excluded are Selling costs, abnormal wastage, administration costs