Question

Bike World recently opened several stores in New South Wales. The owner is considering whether a perpetual or periodic inventory system should be used. The company also has an inventory of a bike model with details below:

Requirements:

• Explain the essential differences in accounting treatments between perpetual and periodic inventory systems. You have to use journal entries to demonstrate each difference. With the nature of Bike World’s business, which system would you suggest to the owner? Why?
• Using a spreadsheet, calculate the ending inventory and Cost of Goods Sold for June, using the average cost, LIFO, and FIFO methods. Present your answers in both normal and formula views with rows and column headings. In the spreadsheet, you are required to have a data section separated from a report section.
• The company is not doing very well and the owner wants to call funds from potential investors. Based on all the above factors, what inventory method would you suggest to the owner, why?

Answer 1

	Perpectual Inventory System;
1	Average cost method
Date	Transactions	Quantity	Unit cost	Amount ($ )
1-Jun	Beginning inventory	35	215.00	7,525.00
5-Jun	Purchase	20	217.00	4,340.00
7-Jun	Purchase	35	220.00	7,700.00
8-Jun	Purchase	25	210.00	5,250.00
10-Jun	Cost of goods sold	-80	215.78	(17,262.61)
17-Jun	Purchase	35	208.00	7,280.00
20-Jun	Cost of goods sold	-55	211.89	(11,654.02)
25-Jun	Purchase	30	222.00	6,660.00
30-Jun	Ending Inventory	45		9,838.37
	Total sales ( 135 units x $ 350 )	47,250.00
	Less: Total Cost of goods sold	(28,916.63)
	Gross Profit	18,333.37
2	LIFO method
Date	Transactions	Quantity	Unit cost	Amount ($ )
1-Jun	Beginning inventory	35	215.00	7,525.00
5-Jun	Purchase	20	217.00	4,340.00
7-Jun	Purchase	35	220.00	7,700.00
8-Jun	Purchase	25	210.00	5,250.00
10-Jun	Cost of goods sold	-25	210.00	(5,250.00)
	"	-35	220.00	(7,700.00)
		-20	217.00	(4,340.00)
17-Jun	Purchase	35	208.00	7,280.00
20-Jun	Cost of goods sold	-35	208.00	(7,280.00)
	"	-20	215.00	(4,300.00)
25-Jun	Purchase	30	222.00	6,660.00
30-Jun	Ending Inventory	45		9,885.00
	Total sales ( 135 units x $ 350 )	47,250.00
	Less: Total Cost of goods sold	(28,870.00)
	Gross Profit	18,380.00
3	FIFO method
Date	Transactions	Quantity	Unit cost	Amount ($ )
1-Jun	Beginning inventory	35	215.00	7,525.00
5-Jun	Purchase	20	217.00	4,340.00
7-Jun	Purchase	35	220.00	7,700.00
8-Jun	Purchase	25	210.00	5,250.00
10-Jun	Cost of goods sold	-35	215.00	(7,525.00)
	"	-20	217.00	(4,340.00)
	"	-25	220.00	(5,500.00)
17-Jun	Purchase	35	208.00	7,280.00
20-Jun	Cost of goods sold	-10	220.00	(2,200.00)
	"	-25	210.00	(5,250.00)
	"	-20	208.00	(4,160.00)
25-Jun	Purchase	30	222.00	6,660.00
30-Jun	Ending Inventory	45		9,780.00
	Total sales ( 135 units x $ 350 )	47,250.00
	Less: Total Cost of goods sold	(28,975.00)
	Gross Profit	18,275.00
	Periodic Inventory System;
1	Average cost method
Date	Transactions	Quantity	Unit cost	Amount ($ )
1-Jun	Beginning inventory	35	215.00	7,525.00
5-Jun	Purchase	20	217.00	4,340.00
7-Jun	Purchase	35	220.00	7,700.00
8-Jun	Purchase	25	210.00	5,250.00
17-Jun	Purchase	35	208.00	7,280.00
25-Jun	Purchase	30	222.00	6,660.00
	TOTAL	180		38,755.00
	Average cost per unit ( $ 38,755 / 180 units)	215.31
30-Jun	Ending Inventory ( 45 units x $ 215.31 )	9,688.75
	Total sales ( 135 units x $ 350 )	47,250.00
	Less: Total Cost of goods sold ( 135 units x $ 215.31 )	(29,066.25)
	Gross Profit	18,183.75
2)	LIFO	Units	Rate	Amount $
	Total sales ( 135 units x $ 350 )	135	350.00	47,250.00
	Cost of goods sold;
		30.00	222.00	6660
		35.00	208.00	7280
		25	210.00	5250
		35	220.00	7700
		10	217.00	2170
	Total cost of goods sold	135.00		29060
	Gross profit			18,190.00
	Ending Inventory	45		9,695.00
3	FIFO	Units	Rate	Amount $
	Total sales	135	350.00	47,250.00
	Cost of goods sold;
		35.00	215.00	7525
		20.00	217.00	4340
		35.00	220.00	7700
		25.00	210.00	5250
		20.00	208.00	4160
	Total cost of goods sold	135.00		28975
	Gross profit			18,275.00
	Ending Inventory	45		9,780.00

	Average			LIFO			FIFO
	Perpectual	Periodic	Difference	Perpectual	Periodic	Difference	Perpectual	Periodic	Difference
Cost of goods sold	28,916.63	29,066.25	149.62	28,870.00	29060	190.00	28,975.00	28975	-
Gross Profit	18,333.37	18,183.75	(149.62)	18,380.00	18,190.00	(190.00)	18,275.00	18,275.00	-
Ending Inventory	9,838.37	9,688.75	(149.62)	9,885.00	9,695.00	(190.00)	9,780.00	9,780.00	-