ch4 PDF

Chapter 4
Inventory
Assessment Questions
AS-1 ( 2 )
Explain the difference between a purchase return and a purchase allowance.
A
purchase return can occur when a good needs to be returned due to poor quality. A
______________________________________________________________________________
purchase
allowance occurs when the buyer agrees to hold on to the inferior good in return for
______________________________________________________________________________
a______________________________________________________________________________
reduction in its cost.
AS-2 ( 2 )
Explain the difference between a sales allowance and a sales discount.
A
sales allowance occurs when a reduction to the original selling price is given to the
______________________________________________________________________________
customer
(e.g. goods sold were damaged during shipping and customer agrees to hold on
______________________________________________________________________________
to
goods). A sales discount is an offer made to a customer whereby the selling price will be
______________________________________________________________________________
reduced
if the customer makes, say, an early payment.
______________________________________________________________________________
AS-3 ( 3 )
List the different ways of valuing inventory.
Specific
identification, weighted-average cost, and First-in-First-out (FIFO). All of these systems
______________________________________________________________________________
are
allowed under Generally Accepted Accounting Principles.
______________________________________________________________________________
______________________________________________________________________________
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AS-4 ( 3 )
In times of rising prices, which inventory valuation method results in the highest closing
inventory? Explain your answer.
FIFO,
because the lower cost goods are transferred to COGS, and the higher cost of inventory
______________________________________________________________________________
remains
on the balance sheet.
______________________________________________________________________________
______________________________________________________________________________
AS-5 ( 3 )
Different inventory valuation methods result in different inventory values. What factors may
cause a company to select FIFO, weighted average or specific identification?
Your
selection should be based on the principle of conservatism, and perhaps reflect the
______________________________________________________________________________
physical
flow of inventory.
______________________________________________________________________________
A
company with high-value inventory items, each valued individually (e.g. diamonds,
______________________________________________________________________________
automobiles,
houses), may choose to use specific identification.
______________________________________________________________________________
A
grocery store, where vegetables may rot if they are kept too long, may use a first-in first-out
______________________________________________________________________________
method
to reflect the movement of goods.
______________________________________________________________________________
Companies
that deal with goods that are identical may choose to use the average cost
______________________________________________________________________________
method.
______________________________________________________________________________
AS-6 ( 5 )
The use of lower of cost or market is based on what GAAP principle?
Valuing
inventories at the lower of cost or market value is an application of the accounting
______________________________________________________________________________
principle
of conservatism.
______________________________________________________________________________
______________________________________________________________________________
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AS-7 ( 4 , 8 )
What are the causes of a misstated inventory balance?
fraud on the part of managers and others
______________________________________________________________________________
inexperience on the part of people counting (e.g. they may miscount)
______________________________________________________________________________
careless counting procedures
______________________________________________________________________________
using incorrect prices when valuing goods
______________________________________________________________________________
ineffective, or non-existent, internal controls
______________________________________________________________________________
calculation errors (not as likely to happen when using accounting software)
______________________________________________________________________________
entering data incorrectly into the computer system
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
AS-8 ( 6 )
Name two methods which can be used to estimate inventory for interim statement purposes.
Gross
profit method, and retail method.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
AS-9 ( 1 )
What is the benefit to a company of using a perpetual inventory system?
Managing
inventory is an important part of many businesses. If you have too much inventory,
______________________________________________________________________________
you
are unnecessarily tying up capital that you could use more productively in other areas. On
______________________________________________________________________________
the
other hand, if you have too little inventory (and you are unaware of the inventory level)
______________________________________________________________________________
and
you receive an unanticipated large order from a customer, you may not be able to supply
______________________________________________________________________________
the
product which can result in a loss in market credibility. A perpetual inventory system
______________________________________________________________________________
allows
you to know at any time how much inventory you have on hand because it maintains a
______________________________________________________________________________
continuous
record of the changes to inventory.
______________________________________________________________________________
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AS-10 ( 2 , 9 )
Differentiate the journal entries required for sales when using a perpetual inventory system
from the entries required when using a periodic inventory system.
When
a company uses a perpetual inventory system, when a sale is recorded, a journal
______________________________________________________________________________
entry
removing the cost of the sale from inventory is required; this should be followed by an
______________________________________________________________________________
increase
to the cost of goods sold account.
______________________________________________________________________________
When
a company uses a periodic inventory system, no inventory entry is required when the
______________________________________________________________________________
sale
is made. The actual cost of goods sold is only known at year end (or some other date),
______________________________________________________________________________
when
the inventory is counted and assigned a value.
______________________________________________________________________________
AS-11 ( 8 )
List three reports that are useful for managing inventory.
The
use of accounting software to maintain perpetual inventory records, and maintain the
______________________________________________________________________________
accounting
database allows you to prepare just about any inventory-related report you might
______________________________________________________________________________
imagine,
including:
______________________________________________________________________________
inventory on hand, showing quantities, description, location in the warehouse,
______________________________________________________________________________
etc.
______________________________________________________________________________
number of units purchased, by product, showing date of purchase, etc.
______________________________________________________________________________
number of units sold, by product, showing date of sale, etc.
______________________________________________________________________________
number of items on hand, by product, showing date ordered, estimated delivery
______________________________________________________________________________
date, etc.
______________________________________________________________________________
gross profit by product
______________________________________________________________________________
______________________________________________________________________________
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AS-12 ( 8 )
List five internal controls that are useful for controlling and managing inventory.
In
addition to the use of computerized accounting for the maintenance of perpetual
______________________________________________________________________________
inventory
records, there are also other internal controls applicable to inventories. Such
______________________________________________________________________________
controls
may include
______________________________________________________________________________
analysis of variances (unusual amounts on hand, large shipments, etc.)
______________________________________________________________________________
approvals for movement into or out of inventory locations
______________________________________________________________________________
control self-assessment
______________________________________________________________________________
designating one person to be in charge of inventories (segregation of duties)
______________________________________________________________________________
internal audit review
______________________________________________________________________________
physical barriers around areas where inventory is stored
______________________________________________________________________________
reconciliation of sub-ledger balances with the general ledger and physical stock
______________________________________________________________________________
on hand when a perpetual system is used
______________________________________________________________________________
regular physical count of all inventory
______________________________________________________________________________
regular test-counts of physical inventory and comparison with records
______________________________________________________________________________
review of inventory records and physical inventories by a responsible person
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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AS-13 ( 1 )
You, being an accountant of Bask Retailers, are beginning the adjusting and closing process
at the end of the fiscal year. Does the trial balance contain the correct ending balance of
inventory if the business uses the perpetual inventory system? Why or why not?
Yes,
under perpetual inventory system, the trial balance carries the correct ending balance of
______________________________________________________________________________
inventory
as a current asset. This is because all transactions relating to purchases, discounts,
______________________________________________________________________________
freight,
returns and allowances have been accounted for. COGS has already been transferred
______________________________________________________________________________
to COGS account. There is no need to calculate COGS.
______________________________________________________________________________
AS-14 ( 1 )
Explain how costs of goods available for sale is calculated in a periodic inventory system.
Cost
of goods available for sale in periodic inventory system is calculated by adding the
______________________________________________________________________________
beginning inventory and net purchases together. It shows the amount of units a company has
______________________________________________________________________________
in
inventory.
______________________________________________________________________________
AS-15 ( 3 )
Describe the principles a company may follow while choosing an inventory valuation method.
There are two principles that apply when a company chooses an inventory valuation method:
1. The method chosen can be somewhat arbitrary, since it does not have to actually
______________________________________________________________________________
reflect the movement of goods. For example, if a business chooses the first-in______________________________________________________________________________
first-out (FIFO) method, a product from the top of the pile can still end up leaving
______________________________________________________________________________
inventory first.
______________________________________________________________________________
2. Once a valuation method is chosen, the company has to stay with it. The reason for
______________________________________________________________________________
this is that a company may be tempted to change the method used in order to impact
______________________________________________________________________________
cost of goods sold and closing inventory values, which can both change depending on
______________________________________________________________________________
the valuation method. (This adheres to the GAAP principle of consistency).
______________________________________________________________________________
______________________________________________________________________________
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Chapter 4
AS-16 ( 4 )
Describe the impacts of inventory errors.
Overstated
gross profits resulting from inflated inventory can give management a false sense
______________________________________________________________________________
of
confidence in the company. This could lead to bad decisions when it comes to pricing
______________________________________________________________________________
discounts,
target market share, or other aspects of business performance. The reverse would
______________________________________________________________________________
be
true for understated numbers, which could create unnecessary panic and desperation on the
______________________________________________________________________________
part
of ownership.
______________________________________________________________________________
An
inaccurate gross profit figure can also have consequences when it comes to paying taxes.
______________________________________________________________________________
A
higher gross profit leads to higher net income, which means that a company is paying more
______________________________________________________________________________
tax
than it should. Perhaps even more importantly, an understated gross profit figure leads to an
______________________________________________________________________________
understated
net income amount, which means that the government is getting less in taxes from
______________________________________________________________________________
the
company than it should. Finally, a company could use its inflated financial figures to create
______________________________________________________________________________
a______________________________________________________________________________
false impression of its performance on external stakeholders, or even on banks when trying to
secure
loans. This can represent an ethical breach in violation of GAAP rules of disclosure.
______________________________________________________________________________
AS-17 ( 3 )
Which of the inventory valuation method can be used by the companies for showing better
results in case of rising prices?
1. When prices are rising, units purchased recently will have the highest prices.
______________________________________________________________________________
Therefore FIFO will result in the highest value of ending inventory as cheaper
______________________________________________________________________________
products bought in previous periods will be sold first and relatively expensive
______________________________________________________________________________
products purchased recently will remain in the Inventory. Weighted average cost
______________________________________________________________________________
will be lower since it is an average of the inventory values over time.
______________________________________________________________________________
2. FIFO reports the most accurate value of ending inventory as it is based on the
______________________________________________________________________________
most recent purchases.
______________________________________________________________________________
Conclusion:
When ending inventory amounts change, so does the cost of goods sold, gross
______________________________________________________________________________
profit
and net income. Therefore companies can dramatically change their financial results by
______________________________________________________________________________
manipulating
the inventory valuation method.
______________________________________________________________________________
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AS-18 ( 8 )
How can a company monitor and prevent inventory shrinkage?
There
are various red flags that help a company monitor and prevent inventory shrinkage.
______________________________________________________________________________
One
such red flag occurs when sales lag inventory levels. In other words, the company is
______________________________________________________________________________
buying
more than it is selling. Some of that inventory is obviously not going to the customer.
______________________________________________________________________________
Another
potential inventory red flag should pop up when shipping costs lag inventory.
______________________________________________________________________________
Again,
this indicates that the company is not shipping out as many items as it is receiving in
______________________________________________________________________________
inventory.
The missing items might well have been taken by thieves.
______________________________________________________________________________
All
companies should be in the practice of noting these red flags and ensuring measures are
______________________________________________________________________________
in
place to prevent or detect theft. Furthermore, all businesses should implement security
______________________________________________________________________________
measures
that properly safeguard inventory on their premises.
______________________________________________________________________________
AS-19 ( 8 )
List two safety measures that can be taken to avoid inventory losses through theft.
To
avoid theft, inventory facilities are usually locked up after closing. The more valuable the
______________________________________________________________________________
inventory,
the more elaborate the security measures needed to protect it. The safety measures
______________________________________________________________________________
can
include anything from fences and guard dogs to alarm systems, security guards or even
______________________________________________________________________________
the
hiring of an inventory custodian who is charged specifically with protecting the inventory.
______________________________________________________________________________
AS-20 ( 5 )
Describe the reason for applying the principle of lower of cost or market (LCM) to inventory.
The
principle of lower of cost or market (LCM) is applied to inventory so that the GAAP
______________________________________________________________________________
principle
of conservatism is followed, requiring companies to value assets at the lower of
______________________________________________________________________________
possible
alternatives. This prevents companies from providing an overly optimistic state of
______________________________________________________________________________
their
finances.
______________________________________________________________________________
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Inventory
Chapter 4
AS-21 ( 8 )
What is the impact of inflating inventory on financial statements? What is the ethical
responsibility of management in this regard?
The
impact of inflating closing inventory is significant. It reduces the cost of goods sold and
______________________________________________________________________________
increases
net income for the year. It also inflates cost of goods sold and understates net
______________________________________________________________________________
income
for the following year. Therefore, any manipulation of inventory value has negative
______________________________________________________________________________
consequences
that extend beyond the current fiscal year. The ethical responsibility of
______________________________________________________________________________
management
is to ensure this does not happen, by detecting errors and the causes behind
______________________________________________________________________________
them.
______________________________________________________________________________
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Application Questions
AP-1 ( 2 )
Hip Top Shirt Retailers bought $15,000 worth of shirts from Super Shirt Wholesalers Ltd. on
March 15th. Payment was due in April. Prepare the journal entry at the time of purchase.
Assume they use the perpetual inventory system.
Date
Mar 15
Account Title and Explanation

Inventory
Debit
Credit
15,000
Accounts Payable
15,000
Record the purchasing of inventory
AP-2 ( 2 )
Referring to the purchase made in AP-1 above, prepare the journal entry for Hip Top Shirt
Retailers for the payment of $15,000 made to Super Shirt Wholesalers on April 15th.
Date
Apr 15

Accounts Payable
Debit
Credit
15,000
Cash
15,000
Record the payment to Super Shirt Wholesalers
AP-3 ( 9 )
Refer to AP-1 above and, assuming Hip Top Shirt uses the periodic inventory system, record the
journal entries at time of purchase and at time of payment.
Date
Mar 15

Purchases
Debit
Credit
15,000
Accounts Payable
15,000
Record the purchasing of Inventory

Apr 15
Accounts Payable
Cash
Record the payment to Super Shirt Wholesalers
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15,000
15,000
Chapter 4
Inventory
AP-4 ( 2 )
JB Supermarkets bought $3,000 worth of groceries on account from a produce supplier on
May 10th. On May 11th, JBs bookkeeper was informed that $200 worth of tomatoes was
substandard and returned to the supplier. Prepare the journal entry to record the purchase
return. Assume they use the perpetual inventory system.
Date
May 11

Accounts Payable
Debit
Credit
200
Inventory
200
Record the purchase return
AP-5 ( 9 )
Refer to ap-4 above and record the purchase return assuming KB uses a periodic inventory
system.
Date
May 11

Accounts Payable
Debit
Credit
200
Purchase Returns and Allowances
200
AP-6 ( 2 )
On January 12th, Corner-Mart received a shipment of T-shirts from Promo Novelties for an
event. The invoice amounted to $5,000 and was recorded in the accounting system. Soon
after the delivery was made, the marketing manager discovered that the logo was printed
incorrectly. The goods were returned to Promo Novelties on January 31st. Prepare the journal
entry that would be recorded on January 31st. Assume Corner-Mart uses the perpetual
inventory system.
Date
Jan 31

Accounts Payable
Debit
Credit
5,000
Inventory
5,000
AP-7 ( 9 )
Refer to AP-6 above. Record the purchase return assuming Corner-Mart uses a periodic
inventory system.
Date
Jan 31

Accounts Payable
Debit
Credit
5,000
5,000
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AP-8 ( 2 )
Signs Unlimited received a shipment of plastic sheets on April 3rd. The value of the plastic was
$8,000, plus $100 of freight charges. Prepare the journal entry to record the receipt of goods
by Signs Unlimited, assuming the payment would be made in May. Assume they use the
perpetual inventory system.
Date
Apr 3

Inventory
Debit
Credit
8,100
Accounts Payable
8,100

($8,000 + $100 = $8,100)
AP-9 ( 2 )
Referring to AP-8 above, several of the plastic sheets delivered to Signs Unlimited were in the
wrong colour. After some negotiation, the manager agreed to keep the products with a 10%
discount. Prepare the entry on April 10th to record the purchase allowance. (Assume all plastic
sheets were still in inventory.) Continue to assume they use the perpetual inventory system.
Date
Apr 10

Accounts Payable
Debit
Credit
800
Inventory
800
Allowance for goods with wrong colour

($8,000 x 10% = $800)
AP-10 ( 2 )
Refer to AP-8 and AP-9 above and journalize the transaction for Signs Unlimited when the
payment is made on May 3rd. Continue to assume they use the perpetual inventory system.
Date
May 3

Accounts Payable
Cash
Debit
Credit
7,300
7,300
Payment for the goods
AP-11 ( 9 )
Boards Unlimited received a shipment of plastic sheets on April 3rd. The value of the plastic
was $8,000, plus $100 of freight charges. Prepare the journal entry to record the receipt of
goods by Boards Unlimited, assuming the payment would be made in May. Assume they use
the periodic inventory system.
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Chapter 4
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Date
Apr 3
Debit
Purchases
8,000
Freight-in
100
Accounts Payable
Credit
8,100

($8,000 + $100 = $8,100)
AP-12 ( 9 )
Referring to AP-11 above, several of the plastic sheets delivered to Boards Unlimited were in the
wrong colour. After some negotiation, the manager agreed to keep the products with a 10%
discount. Prepare the entry on April 10th to record the purchase allowance. (Assume all plastic
sheets were still in inventory.) Continue to assume they use the periodic inventory system.
Date
Apr 10

Accounts Payable
Debit
Credit
800
Purchase Returns and Allowance
800
Allowance for goods with wrong colour

($8,000 x 10% = $800)
AP-13 ( 9 )
Referring to AP-11 and AP-12 above, journalize the transaction for Boards Unlimited when the
payment is made on May 3rd. Continue to assume they use the periodic inventory system.
Date
May 3

Accounts Payable
Cash
Debit
Credit
7,300
7,300
Payment for the goods
AP-14 ( 1 )
The following is written on an invoice relating to goods that were purchased: 5/10, n/30. What
does it mean?
It means a 5% discount would apply if paid within 10 days. The net amount owing is due in 30
______________________________________________________________________________
days.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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AP-15 ( 1 )
Shoe Retailers purchased $10,000 worth of shoes from Runner Wear Supplies on March 1st.
Since Shoe Retailers has good cash reserves, the accountant took advantage of the early
payment discount that Runner Wear offers. Runner Wears invoice shows terms of 2/10, n/30.
What is the latest date that Shoe Retailers could pay the bill to take advantage of the discount?
March
11
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
AP-16 ( 2 )
Refer to AP-15 above. As the bookkeeper for Shoe Retailers, prepare the journal entry to
record the purchase on March 1st. Assume they use the perpetual inventory system.
Date
Mar 1

Inventory
Debit
Credit
10,000
Accounts Payable
10,000
Record the purchase
AP-17 ( 2 )
Referring to AP-15 above, journalize the transaction for payment of the invoice, assuming the
payment was made on March 5th. Continue to assume they use the perpetual inventory
system.
Date
Mar 5

Accounts Payable
Debit
Credit
10,000
Cash
9,800
Inventory
200
Paid Invoice owing less discount received
AP-18 ( 2 )
payment was made on March 30th. Continue to assume they use the perpetual inventory
system.
Date
Mar 30

Accounts Payable
Cash
Record the payment to Runner Wear Supplies
122
Debit
Credit
10,000
10,000
Chapter 4
Inventory
AP-19 ( 1 )
Socks Retailers purchased $10,000 worth of shoes from Jogger Wear Supplies on March
1st. Since Socks Retailers has good cash reserves, the accountant took advantage of the
early payment discount that Jogger Wear offers. Jogger Wears invoice shows terms of 2/15,
n/60. What is the latest date that Socks Retailers could pay the bill to take advantage of the
discount?
March
16
______________________________________________________________________________
______________________________________________________________________________
AP-20 ( 9 )
Refer to AP-19 above. As the bookkeeper for Sock Retailers, prepare the journal entry to
record the purchase on March 1st. Assume they use the periodic inventory system.
Date
Mar 1

Purchases
Debit
Credit
10,000
Accounts Payable
10,000
Record the purchase
AP-21 ( 9 )
payment was made on March 5th. Continue to assume they use the periodic inventory
system.
Date
Mar 5

Accounts Payable
Debit
Credit
10,000
Cash
9,800
Purchase Discount
200
Paid Invoice owing less discount received
AP-22 ( 9 )
payment was made on March 30th. Continue to assume they use the periodic inventory
system.
Date
Mar 30

Accounts Payable
Cash
Debit
Credit
10,000
10,000
Record the payment to Jogger Wear Supplies
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AP-23 ( 2 )
On March 20th, Cup-A-Java received a shipment of gift mugs for resale from Cup Makers Inc.
in the amount of $5,000, plus $200 shipping charges. The terms stated on the invoice from
Cup Makers Inc. were as follows: 3/15, n/60. Assume they use the perpetual inventory system.
Journalize the following scenarios:
a) As the bookkeeper for Cup-A-Java, complete the original invoice transaction.
Date
Mar 20

Inventory
Debit
Credit
5,200
Accounts Payable
5,200
Record the purchase of inventory plus

freight charges
b) If Cup-A-Java decided to take advantage of the early payment cash discount, by

when should the payment be made to qualify for the discount?
April
4th (counting from March 21)
______________________________________________________________________________
______________________________________________________________________________
c) The payment by Cup-A-Java to Cup Makers Inc. was made on March 31st. Prepare
the journal entry for the payment of goods. Continue to assume they use the
Date
Mar 31

Accounts Payable
Debit
Credit
5,200
Cash
5,050
Inventory
150
Paid invoice owing less discount received for early

payment ($5,000 x 0.03 = $150)
d) Journalize the entry if payment was made on May 20th. Continue to assume they
use the perpetual inventory system.
Date
May 20

Accounts Payable
Cash
Record the payment to Cup Makers Inc.
124
Debit
Credit
5,200
5,200
Chapter 4
Inventory
e) Suppose 20% of the shipment was returned on March 25th because they were in the
wrong colour. Cup Makers Inc. agreed to apply the same percentage deduction to
the freight charges. The invoice has not been paid. Prepare the journal entry to record
this transaction. Continue to assume they use the perpetual inventory system.
Date
Mar 25

Accounts Payable
Debit
Credit
1,040
Inventory
1,040

($5,000 x 0.2 + $200 x 0.2 = $1,040)
f ) Continue from part e, journalize the entry if Cup-A-Java took advantage of the
early payment cash discount when paying for the balance of the cups on March
31st. Round off to the nearest dollar. Continue to assume they use the perpetual
inventory system.
Date
Mar 31

Accounts Payable
Cash
Inventory
Debit
Credit
4,160
4,040
120
Paid invoice owing less discount

($4,000 x 0.03 = $120)
AP-24 ( 1 )
If a computer company bought computers for $10,000 and sold them for $14,000, how much
would the gross profit be on the entire shipment if the business took advantage of the early
cash payment terms of 2/15, n/30 from their supplier?
Gross
Profit = $14,000 [$10,000 - ($10,000 x 2%)] = $4,200
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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AP-25 ( 2 )
On May 1st, Food Wholesalers purchased $3,000 worth of dried fruit inventory plus $100
freight charges on account. On May 15th, Food Wholesalers sold all of the dried fruit inventory
to Retail Grocers for $4,000 on account. As the bookkeeper for Food Wholesalers, journalize
the transactions. Assume they use the perpetual inventory system.
Date
May 1

Inventory
Debit
Credit
3,100
Accounts Payable
3,100
Purchased inventory on account

May 15
Accounts Receivable
4,000
Sales Revenue
4,000
Made sales on account

May 15
COGS
Inventory
3,100
3,100
Record COGS
AP-26 ( 2 )
Referring to AP-25 above, if operating expenses were $500:
a) How much was Food Wholesalers gross profit?
$4,000 - $3,100 = $900 gross profit
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
b) How much was Food Wholesalers net income?
$900 - $500 = $400 net income
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
AP-27 ( 2 )
Macks is a maker of cotton garments that sells to various retailers. On June 1st, Corys Retailers
sent back a shipment of goods that was unsatisfactory. As a gesture of goodwill, Macks
agreed to the return of the goods. The goods were sold on account for $6,000 originally and
cost $4,000. Assume they use the perpetual inventory system. Complete the following:
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Chapter 4
Inventory
a) As Macks bookkeeper prepare the journal entries to reflect the return.

Date
Jun 1

Sales Returns and Allowances
Debit
Credit
6,000
Accounts Receivable
6,000
Record sales returns for unsatisfactory products

Inventory
4,000
COGS
4,000
Restock inventory return
b) Journalize the entry if Corys only returned half of the shipment. Continue to assume
they use the perpetual inventory system.
Date
Jun 1

Debit
Credit
3,000
Accounts Receivable
3,000
Record sales returns for unsatisfactory products

Inventory
COGS
2,000
2,000
Restock inventory return
c) What happened to the value of Macks owners equity when Corys returned the
merchandise? Did it increase, decrease or stay the same? Explain your answer.
Owners
equity decreased because sales returns and allowances is a contra-revenue account,
______________________________________________________________________________
which
decreases revenue (i.e. owners equity). Although the decrease to cost of goods sold
______________________________________________________________________________
will
increase equity, equity will ultimately decrease because the sales returns and allowances
______________________________________________________________________________
is
a larger value.
______________________________________________________________________________
d) Explain the logic behind debiting the sales returns and allowances as a
contra-account instead of debiting the revenue account directly.
Debiting
a contra-account allows one to effectively track and separate total sales from returns.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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AP-28 ( 2 )
Assume you are the bookkeeper for Moiras Wholesalers, a distributor of kitchen furniture.
Your sales manager informed you that Teds Retailers were unhappy with the quality of
some tables delivered on August 12th, and they will be shipping back all the goods. The
original invoice amounted to $1,500 and the goods cost Moiras $1,000. Assume they use the
perpetual inventory system. Complete the journal entries for each of the following scenarios:
a) Rather than taking the tables back, your sales manager agreed to allow Teds
Retailers a 10% discount if they agreed to keep the goods. Record Teds payment in
settlement of the invoice on September 12th.
Date
Sep 12

Cash
Debit
Credit
1,350
Accounts Receivable
1,350
Collected outstanding accounts receivable

($1,500 x 0.9 = $1,350)
b) Suppose that Teds shipped back all the goods on August 15th. Journalize the
transactions. Continue to assume they use the perpetual inventory system.
Date
Aug 15

Sales Return and Allowances
Debit
Credit
1,500
Accounts Receivable
1,500
Record sales returns from Teds Retailers

Aug 15
Inventory
1,000
COGS
1,000
Restock inventory returned
c) S uppose that Teds shipped back half the goods on August 15th and kept the other
half with 10% discount. Journalize the transactions that took place on August 15th.
Continue to assume they use the perpetual inventory system.
Date
Aug 15

Debit
Credit
825
Accounts Receivable
825
Record sales returns from Teds Retailers

Inventory
COGS
500
500
d) Continue from part b. Since all the goods were sold and returned in the same
period, what happened to Moiras gross profit? (Disregard the additional shipping
and administration costs). Explain your answer.
128
Chapter 4
Inventory
Moiras
gross profit increased by $1,500 when goods were sold and decreased by the same
______________________________________________________________________________
amount
when goods were returned. Therefore, there is no change in gross profit.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
AP-29 ( 2 )
Petes Wholesalers imports and distributes towels. They sell their products to various retailers
throughout the country and offer payment terms of 2/10, n/30. On October 1st, Petes made
a large sale to Ernies Bathroom Retailers in the amount of $15,000, which cost Petes $9,000.
Petes uses a perpetual inventory system. Complete the following:
a) Journalize the sale that was made on account.
Date
Oct 1

Accounts Receivable
Debit
Credit
15,000
Sales Revenue
15,000

COGS
9,000
Inventory
9,000
Record COGS
b) By what date must Ernies pay the invoice to qualify for the early cash payment
discount?
By
October 11
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
c) Assume Ernies paid the bill on October 5th. Record the journal entries. Continue to
assume they use the perpetual inventory system.
Date
Oct 5

Cash
Sales Discount
Accounts Receivable
Debit
Credit
14,700
300
15,000
Collected Accounts Receivable less discount

allowed
129
Chapter 4
Inventory
d) If Ernies had returned half the shipment and paid for the balance owing on
October 5th, how would the transaction be journalized? Continue to assume they
use the perpetual inventory system.
Date
Oct 5

Sales Return and Allowance
Debit
Credit
7,500
Accounts Receivable
7,500
Record sales returns from Ernies

Inventory
4,500
COGS
4,500

Cash
7,350
Sales Discount
150
Accounts Receivable
7,500
Collected accounts receivable less discount

allowed
e) Suppose Ernies found the goods unsatisfactory and agreed to keep the goods
with a 10% discount. Prepare the journal entry to record the sales allowance and
Ernies payment on October 20th. Continue to assume they use the perpetual
inventory system.
Date
Oct 20

Sales Return and Allowance
Debit
Credit
1,500
Accounts Receivable
1,500
Allowance provided to Ernies for unsatisfactory

goods
Oct 20
Cash
13,500
Accounts Receivable
13,500
Collected outstanding Accounts Receivable
f ) Referring to part a - Ernies kept the entire shipment and paid the invoice on
October 10th to take advantage of the early payment discount. Record the journal
entries for the payment to Petes. Continue to assume they use the perpetual
inventory system.
Date
Oct 10

Cash
Sales Discount
Accounts Receivable
Collected Accounts Receivable less discount
allowed
130
Debit
Credit
14,700
300
15,000
Chapter 4
Inventory
AP-30 ( 2 )
Assume you are the bookkeeper for Joe The Printer. The company buys ink cartridges from
various suppliers, refills them and sells them to customers. All purchases and sales are made
on account. Assume they use the perpetual inventory system. Complete the following for Joe
The Printer.
a) Record the purchase on December 15th of $3,000 ink cartridges from Inkster
Supplies, whose payment terms are 3/10, n/45.
Date
Dec 15

Inventory
Debit
Credit
3,000
Accounts Payable
3,000
Purchased inventory, term 3/10, n/45
b) When must Joe pay the account to qualify for the discount?
By
Dec 25th
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
c) Prepare the journal entry to record Joes payment on December 20th. Continue to
Date
Dec 20

Accounts Payable
Debit
Credit
3,000
Inventory
90
Cash
2,910

($3,000 x 0.03 = $90)
d) If Joes made the payment on December 31st instead, journalize the transaction.
Continue to assume they use the perpetual inventory system.
Date
Dec 31

Accounts Payable
Cash
Debit
Credit
3,000
3,000
Paid invoice owing
131
Chapter 4
Inventory
e) If Joes returned one-third of the products and paid the balance, how would both
of these transactions be journalized? Assume both transactions occurred on
December 20th. Continue to assume they use the perpetual inventory system.
Date
Dec 20

Accounts Payable
Debit
Credit
1,000
Inventory
1,000
Record purchase returns

Accounts Payable
2,000
Inventory
60
Cash
1,940

($2,000 x 0.03 = $60)
f ) If on January 5th, Joes sold all $3,000 worth of inventory for $5,000 to Smith
printers on account, how would the transactions be journalized? Continue to
Date
Jan 5

Accounts Receivable
Debit
Credit
5,000
Sales
5,000

COGS
3,000
Inventory
3,000
Record COGS
g) C
ontinue from the previous question. If Joes selling terms were 4/7, n/30, prepare
the journal entry to record receipt of payment on January 12th. Continue to
Date
Jan 12

Cash
Sales Discount
Accounts Receivable
Collected Accounts Receivable less discounts
allowed
132
Debit
Credit
4,800
200
5,000
Chapter 4
Inventory
AP-31 ( 3 )
Fill in the missing numbers on the perpetual inventory record. The company uses the
weighted average cost for inventory.
Inventory Sub Ledger Account
Purchase / Sales
Date
Description
Quantity
Quantity on Hand
Amount
Quantity
Amount
Purchase from AAA Co.
200
$2,000
200
$2,000
Sale to SSS Co.
-100
-1,000
100
1,000
Sale to TTT Co.
-50
-500
50
500
Purchase from BBB
60
720
110
1,220
Sale to UUU Co.
-20
-222
90
998
AP-32 ( 3 )
Use the information from your completed answer to AP-31. What is the cost of each unit sold
to UUU Co. using the FIFO method?
$2,000
200 = $10 per unit.
______________________________________________________________________________
The
cost of each unit would be $10 under the FIFO method because there were 50 units left
______________________________________________________________________________
from
starting inventory before the new purchase.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
AP-33 ( 3 )
Use the information from your completed answer to AP-31. What is the total cost of the units
sold to UUU Co. using Specific Identification? 10 of the units sold to UUU were purchased from
AAA, and 10 units were purchased from BBB.
Purchase
from AAA unit price = $2,000 200 = 10
______________________________________________________________________________
Purchase
from BBB unit price = 720 60 = 12
______________________________________________________________________________
10
units x $10 = $100
______________________________________________________________________________
10
units x $12 = 120
______________________________________________________________________________
Total
cost: 220
______________________________________________________________________________
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Chapter 4
Inventory
AP-34 ( 3 )
Complete the following table, based on the information in your completed AP-31, AP-32 and
AP-33.
Specific Identification
Balance Before Sale to UUU
COGS on Sale to UUU
Closing inventory Balance
Average Cost
FIFO
1,220
1,220
1,220
220
222
200
1,000
998
1,020
AP-35 ( 5 )
A company has three types of products: gadgets, widgets and gizmos. The cost of each type is
listed below. Complete the table by applying the lower of cost or market method.
Lower of Cost or Market Applied to
Description
Category
Cost
Market
Individual
Category
Gadget Type 1
Gadgets
$1,000
$900
$900
Gadget Type 2
Gadgets
5,000
5,200
5,000
6,000
6,100
Total Gadgets
$6,000
Widget A
Widgets
100
100
100
Widget B
Widgets
20
200
20
120
300
Total Widgets
120
Gizmo 1
Gizmos
1,500
1,450
1,450
Gizmo 2
Gizmos
1,750
2,000
1,750
3,250
3,450
$9,370
$9,850
Total Gizmos
Total
Total
3,250
$9,220
$9,370
$9,370
AP-36 ( 4 )
A company reported ending inventory of $100,000 in year 1. It was discovered in year 2 that
the correct value of the ending inventory was $90,000 for year 1. Complete the following
table, based on this information. Assume the company uses perpetual inventory.
Item
Inventory
Correct Amount
$100,000
90,000
Current Assets
$150,000
140,000
Total Assets
$500,000
490,000
Owner's Equity year 1
$200,000
190,000
Owner's Equity year 2
$235,000
no change
$1,000,000
no change
$500,000
510,000
Profit for year 1
$6,000
(loss) -4,000
Profit for year 2
$15,000
no change
Sales
Cost of Goods Sold
134
Reported
Chapter 4
Inventory
AP-37 ( 6 )
Assume that you have to prepare quarterly financial statements, and the following
information is available from the General Ledger:
Sales
$200,000
Opening Inventory
$67,000
Purchases
$90,000
Gross Profit Margin (from examination of prior years' statements) = 30%
Required:
Calculate the estimated closing inventory using the gross profit method.
Sales
$200,000
Cost of Goods Sold

Opening Inventory
67,000
Purchases
90,000
Cost of Goods Available for Sale
157,000
17,000
Closing Inventory
Cost of Goods Sold ($200,000 - 60,000)
140,000
Gross Profit (30% x $200,000)
$60,000
AP-38 ( 6 )
Shown below is the current information for a company.
Required:
Calculate the estimated closing inventory at cost by using the retail method.
At Cost
At Retail
Cost of Goods Sold

Opening Inventory
2,000
4,000
Purchases
42,000
90,000
44,000
94,000
Sales at Retail
50,000
Closing Inventory at Retail
44,000
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Chapter 4
Inventory
44,000 94,000 = 46.8% =
Cost of goods available for sale at cost

Cost of goods available for sale at retail
Apply
ratio to closing inventory at retail to determine closing inventory at cost
______________________________________________________________________________
44,000
x 46.8% = $20,595 = Closing inventory at cost
______________________________________________________________________________
Note: Closing inventory of $20,595 was arrived at by not rounding the ratio. Rounding the
ratio will cause the answer to be slightly different.
AP-39 ( 2 , 9 )
A company purchases 1,000 units of inventory at $12 per unit on account. The company
subsequently sells 25 units for $50 per unit on account. The company uses a perpetual
inventory system.
Required:
a) Write the journal entries to record the above transactions.
b) Write the journal entries as if the company used a periodic inventory system.
Date
Debit
Credit
Part (a)
Inventory
12,000
Accounts Payable
12,000
To record purchase of units on account

(1,000 at $12.00)
Accounts Receivable
1,250
Sales
Cost of Goods Sold
1,250
300
Inventory
300
To record sale of units on account

(25 at $50 selling price, 25 at $12 cost)
Part (b)
Purchases
12,000
Accounts Payable
12,000
To record purchase of units on account

(1,000 at $12.00)
Accounts Receivable
Sales
To record sale of units on account (25 at $50)
136
1,250
1,250
Chapter 4
Inventory
AP-40 ( 7 )
The following is a list of relevant inventory numbers from ABC Company for the 2010 fiscal
year:
$ Millions
Inventory - December 31, 2009
$108.5
169.7
Cost of Goods Sold
$1,452.5
A list of relevant inventory numbers from XYZ Company for the 2010 fiscal year:
$ Millions
$221.7
209.6
Cost of Goods Sold
$1,432.0
Required:
a) Calculate the Inventory Turnover Ratio and Inventory Days on Hand for ABC
Company.
b) Calculate the Inventory Turnover Ratio and Inventory Days on Hand for XYZ
Company.
c) Compare the results between two companies. What conclusion can we draw
about the performance of these two companies comparatively?
a) Inventory Turnover Ratio: $1,452.5 [($108.5 + $169.7) 2] = 10.4
______________________________________________________________________________
Inventory Days on Hand: 365 10.4 = 35
______________________________________________________________________________
b) Inventory Turnover Ratio: $1,432.0 [($221.7 + $209.6) 2] = 6.6
______________________________________________________________________________
Inventory Days on Hand: 365 6.6 = 55
______________________________________________________________________________
c) The Inventory Turnover Ratio is higher for ABC Company which is more desirable.
______________________________________________________________________________
XYZ Company takes 20 more days to turn over its inventory comparing to ABC
______________________________________________________________________________
Company. However, we do not know if the two companies are in the same industry.
______________________________________________________________________________
Therefore no conclusion should be drawn comparatively.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
137
Chapter 4
Inventory
AP-41 ( 7 )
Delta Corporation reported the following amounts for ending inventory and cost of goods
sold in the financial statements:
Ending Inventory
Cost of Goods Sold
2011
$799,000
2011
$25,927,000
2010
$1,365,000
2010
$36,479,000
2009
$3,205,000
2009
$47,025,000
Required:
a) Calculate the Inventory Turnover Ratio and Inventory Days on Hand for the year
2011 and 2010.
b) Compare and discuss the results between two years.
c) Delta Corporation is a software company in a rapidly changing industry. Evaluate
the results from part (a) by using this information and considering the amount of
cost of goods sold.
a) Inventory Turnover Ratio:
______________________________________________________________________________
2011: $25,927,000 [($799,000 + $1,365,000) 2] = 24
______________________________________________________________________________
2010: $36,479,000 [($1,365,000 + $3,205,000) 2] = 16
______________________________________________________________________________
Inventory Days on Hand:
______________________________________________________________________________
2011: 365 24 = 15
______________________________________________________________________________
2010: 365 16 = 23
______________________________________________________________________________
b) The Inventory Turnover Ratio has improved 50% from 2010 to 2011. It took 8 days
______________________________________________________________________________
less to turn over the inventory in 2011 comparing to 2010.
______________________________________________________________________________
c) Based on the rapid changes that occur in the industry, a higher turnover ratio is
______________________________________________________________________________
preferred in order to avoid carrying obsolete inventories. Therefore the improvement
______________________________________________________________________________
of Inventory Turnover Ratio in 2011 might be positive. However, turning over the
______________________________________________________________________________
entire stock in approximately 15 days may run the risk of having insufficient inventory
______________________________________________________________________________
to meet unexpected customer demand. By comparing the amount of cost of goods
______________________________________________________________________________
sold in 2011 and 2010, we realize that the reduction in inventory in 2011 may be
______________________________________________________________________________
the result of declining sales rather than efficient inventory management.
______________________________________________________________________________
138
Chapter 4
Inventory
AP-42 ( 3 , 10 )
Simplex Inc. has a fiscal year end on December 31. Below is an inventory purchase and sales
record for the year 2011. The company has only one product in inventory, and all units of that
product are identical (homogenous).
Date
Units Purchased
Units Sold
January 1
Units Balance
15 @ $10 each
February 13
20 @$12 each
March 26
15 @ 13 each
April 17
40 @ $20 each
July 25
50 @$14 each
September 28
35 @ $20 each
November 3
20 @ $20 each
December 31
Required:
a) Assume that Simplex Inc. uses the periodic inventory system and values inventory
by using the weighted average method. Calculate the value of ending inventory at
December 31.
b) Assume that Simplex Inc. uses the perpetual inventory system and values inventory
by using the First-In-First-Out (FIFO) method. Calculate the value of cost of goods
sold (COGS) for the year.
a) Average cost:
______________________________________________________________________________
(15 10 + 20 12 + 15 13 + 50 14) (15 + 20 + 15 + 50) = 12.85
______________________________________________________________________________
Ending inventory: 5 x 12.85 = 64.25
______________________________________________________________________________
b) Cost of goods available for sale (COGAFS):
______________________________________________________________________________
(15 10 + 20 12 + 15 13 + 50 14) = $1,285
______________________________________________________________________________
Ending inventory under FIFO
______________________________________________________________________________
5 units x $14 = $70
______________________________________________________________________________
Cost of goods sold = Cost of goods available for sale Ending inventory = $1,215
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
139
Chapter 4
Inventory
AP-43 ( 2 , 9 )
Refer to AP-42 and answer the following:
a) Assume that Simplex Inc. uses the periodic inventory system and values inventory
using the First-In-First-Out (FIFO) method during 2011. Prepare journal entries for
recognizing the sale of 40 units at $20 per unit (recognizing COGS if applicable)
on April 17. Assume that the sale is made on account. For each component of
the journal entries, clearly state whether the debit/credit is made to an income
statement (I/S) account or a balance sheet (B/S) account. (For example, Dr. Cash
(B/S) $10; Cr. Revenue (I/S) $10)
b) Assume that Simplex Inc. uses the perpetual inventory system and values inventory
using the First-In-First-Out (FIFO) method during 2011. Prepare journal entries for
recognizing the sale of 35 units at $20 per unit (recognizing COGS if applicable)
on September 28. Assume that the sale is made on account. For each component
of the journal entries, clearly state whether the debit/credit is made to an income
statement (I/S) account or a balance sheet (B/S) account. (For example, Dr. Cash
(B/S) $10; Cr. Revenue (I/S) $10)
Your Answers:
a)
Date
Apr 17

Accounts Receivable (B/S)
Debit
Credit
800
Sales Revenue (I/S)
800
To record sales on account
b)
Date
Sep 28

Accounts Receivable (B/S)
Debit
Credit
700
Sales Revenue (I/S)
700
To record sales on account

Cost of Goods Sold (I/S)
Inventory (B/S)
To record COGS using FIFO (10 13 + 25 14=480)
140
480
480
Chapter 4
Inventory
AP-44 ( 5 )
Garden Inc. uses the perpetual inventory system and its inventory consists of four products as
at December 31, 2011. Selected information is provided below.
Required:
a) C
alculate the inventory value that should be reported on December 31, 2011, using the
lower of cost or market approach applied on an individual-item basis.
Product
Number of units
Cost (per unit)
Expected selling
price (per unit)
LCM
(Individual)
15
$80
$120
$80
20
$80
$60
$60
40
$60
$50
$50
$120
$180
$120
Inventory
Value: 15 80 + 20 60 + 40 50 + 5 120 = $5,000
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
b) U
sing the results from a), prepare the journal entry to adjust inventory to LCM (at
individual-item level).
Date

Cost of Goods Sold
Debit
Credit
800
Inventory
800
Original cost = $80 x 15 + $80 x 20 + $60 x 40 + $120 x 5 = $5,800

Adjustment = $5,800 - $5,000 = $800
AP-45 ( 6 )
Refer to AP-44. It is now March 31, 2012 and Garden Inc. needs to present a set of financial
statements showing the performance of the first quarter of 2012 to a local bank for a loan. To
prepare the statements in a timely manner, Garden Inc. decided to estimate the inventory
amount instead of doing a physical count. The following information is provided:
Accounts Receivable, January 1, 2012
Accounts Receivable, March 31, 2012
Collections of accounts from January 1 to March 31
Inventory, January 1, 2012
Purchases from January 1 to March 31
$1,500
2,200
5,300
1,200
6,800
Assume all sales are made on account. The sale prices of the products are determined by
marking up costs by 25%.
141
Chapter 4
Inventory
Required:
Calculate the estimated cost of the inventory on March 31, 2012 using the gross profit method.
Inventory, January 1, 2012
$1,200
Purchases from January 1 to March 31
6,800
Goods available for sale
8,000
Collections of accounts from January 1 to March 31
$5,300
Add: accounts receivable, March 31, 2012
2,200
Less: accounts receivable, January 1, 2012
(1,500)
Total sales from January 1 to March 31
$6,000
COGS ($6,000 125%)
(4,800)
Estimated cost of inventory, March 31
$3,200
AP-46 ( 10 )
Good Life Corporation sells medical support products and records purchases at net amounts.
They account for their inventory using the periodic system. In 2011, the following information
was available from the companys inventory records for ankle support products.
Units
January 1, 2011 (beginning inventory)
Unit Cost
1,600
$18.00
January 5, 2011
2,600
$20.00
January 25, 2011
2,400
$21.00
February 16, 2011
1,000
$22.00
March 15, 2011
1,800
$23.00
Purchases
A physical count was taken on March 31, 2011 and showed 2,000 units on hand.
Required:
a) Prepare schedules to calculate the ending inventory at March 31, 2011 under the
FIFO valuation method.
b) Prepare schedules to calculate the ending inventory at March 31, 2011 under the
weighted average valuation method.
a)
Units
March 15, 2011
February 16, 2011
March 31, 2011, inventory
142
Unit Cost
Total Cost
1,800
$23.00
$41,400
200
22.00
4,400
2,000
$45,800
Chapter 4
Inventory
b)
Units
Unit Cost
Total Cost
Beginning inventory
1,600
$18.00
$ 28,800
January 5, 2011
2,600
20.00
52,000
January 25, 2011
2,400
21.00
50,400
February 16, 2011
1,000
22.00
22,000
March 15, 2011
1,800
23.00
41,400
9,400
Weighted average cost
$194,600
($194,600 9,400)
$20.70
2,000
$20.70
March 31, 2011, inventory
$41,400
AP-47 ( 2 , 9 )
For each business transaction in the table below, identify which accounts are debited and
credited. Do this for both the perpetual and periodic inventory system.
Transaction
(a) Purchased inventory on account.
(b) Returned a portion of the inventory
purchased in transaction (a).
(c) Paid for remaining invoice balance after taking
advantage of the early payment discount.
(d) Sold inventory on account.
(e) Customer found that a portion of goods

sold in transaction (d) were of lower quality.
However, he agreed to keep them at 10%
discount.
(f) Customer paid the remaining invoice balance
after taking the advantage of an early
payment discount.
Perpetual Inventory
System
Periodic Inventory
System
DR
CR
DR
CR
Inventory
Accounts
Payable
Purchases
Accounts
Payable
Inventory
Accounts
Payable
Accounts
Payable
Cash & Inventory
Accounts
Payable
Accounts
Receivable &
COGS
Sales &
Inventory
Accounts
Receivable
Sales
Sales Returns
& Allowances
Accounts
Receivable
Sales Returns
& Allowances
Accounts
Receivable
Cash &
Sales Discounts
Accounts
Receivable
Cash &
Sales Discounts
Accounts
Receivable
Accounts
Payable
Purchase
Returns & Allowances
Cash &
Purchase
Discounts
143
Chapter 4
Inventory
AP-48 ( 2 , 8 )
AB Retailers had the following business transactions during the month of April:
Apr 10
AB Retailers bought $3,500 worth of T- shirts from Unique Designers. The

invoice showed payment terms of 2/10, n/30.
Apr 10
Soon after AB Retailers received the products, it was discovered that some
of the T- shirts (worth $500) did not meet quality standards. These goods
were returned to the supplier.
Apr 20
AB Retailers made payment for the remaining invoice balance.
Apr 22
AB Retailers sold all the goods for $4,500 to SK Stores on terms 3/10, n/45.
Apr 28
SK Stores paid for the goods purchased and took advantage of the early
payment discount.
Required:
a) Prepare the journal entries to record the above transactions. Assume the company uses the
Date
Apr 10

Inventory
Debit
Credit
3,500
Accounts Payable
3,500
Recorded purchase of inventory
Apr 10
Accounts Payable
500
Inventory
500
Goods returned to supplier
Apr 20
Accounts payable
Cash
Inventory
Paid remaining invoice balance less discount
received for early payment
144
3,000
2,940
60
Chapter 4
Inventory
Date
Apr 22

Accounts Receivable
Debit
Credit
4,500
Sales
4,500
Goods sold on account

COGS
2,940
Inventory
2,940
Recorded cost of goods sold for above sales

Apr 28
Cash
4,365
Sales Discount
135
Accounts Receivable
4,500
Recorded invoice paid by SK Stores less discount
b) Calculate Aprils ending inventory based on the above transactions. Assume that inventory
at the beginning of April amounted to $1,500.
Ending April Inventory = Beginning ($1,500) + Purchase ($3,500) Returns ($500) Discount
($60) Sale ($2,940) = $1,500
c) At the end of April, an inventory count was performed. The balance of inventory according
to the count was $1,300. Management deemed that the difference between the ledger
account and physical inventory account is due to theft (shrinkage). Prepare the journal
entry to adjust the inventory balance on April 30.
Date
Apr 30

COGS
Debit
Credit
200
Inventory
200
To adjust inventory to the actual physical count
d) Describe some inventory controls that could be implemented to help prevent inventory
shrinkage.
The company could formally introduce inventory procedures and provide training to
employees who handle inventory (e.g. ensure that policies explicitly state that all inventory
items are tagged when received, counts should be performed by two different people and
cross-referenced by a third person to minimize errors). The company could also increase
their protocols related to the safeguarding of inventory (give fewer people physical access to
inventory, have passcodes to enter different parts of the plant).
145
Chapter 4
Inventory
AP-49 ( 2 )
AA Booksellers are in the business of buying and selling books, stationary and related items.
They had the following transactions during the month of January:
Jan 6
AA Booksellers purchased papers worth $6,000 from SK Publishers. The

invoice showed payment terms of 2/10 n/45.
Jan 7
AA Booksellers found that 5% of the papers were of inferior quality. After

negotiations with the suppliers, AA Booksellers decided to keep the papers
at a 10% discount.
Jan 10
AA Booksellers paid SK Publishers invoice and took advantage of the early

payment discount.
Jan 20
AA Booksellers sold paper costing $5,377 for $6,500 to a major customer,

Cathedral High School. The invoice terms were 3/10 n/30.
Jan 23
Cathedral High School paid the invoice on time, taking advantage of the
early payment discount.
AA Booksellers uses the perpetual inventory system. The opening inventory on January 1 was
$200 and the closing inventory on January 31st was $674. The opening balance for accounts
receivable was $500 and the opening balance for accounts payable was $600 on January 1.
Required:
Record the transactions on the following T-Accounts:
INVENTORY
Opening balance (Jan 1)
Purchases (Jan 6)
200
6,000
Allowances for defective goods (Jan 7)

Purchase discount on early payment (Jan 10)
COGS (Jan 20)
Closing balance
30
119
5,377
674
ACCOUNTS PAYABLE
Allowance for defective goods (Jan 7)

Cash and discount (Jan 10)
30
5,970
Opening Balance (Jan 1)

Purchases (Jan 6)
Closing Balance
146
600
6,000
600
Chapter 4
Inventory
SALES REVENUE
Accounts Receivable (Jan 20)
6,500
SALES DISCOUNT
Accounts Receivable (Jan 23)
195
ACCOUNTS RECEIVABLE
Opening Balance (Jan 1)
500
Sales (Jan 20)
Cash and discount (Jan 23)
6,500
6,500
Closing Balance
500
AP-50 ( 9 )
Refer to AP-49 and assume that AA Booksellers uses the periodic inventory system.
a) Prepare the journal entries to record the transactions.
Date
Jan 6

Purchases
Debit
Credit
6,000
Accounts Payable
6,000

Jan 7
Accounts Payable
30
30
Discount on defective goods

Jan 10
Accounts Payable
5,970
Cash
5,851
Purchase Discount
119
Paid remaining invoice balance less discount received

for early payment
Jan 20
Accounts Receivable
Sales
6,500
6,500
147
Chapter 4
Inventory
Date
Jan 23
Debit
Cash
Credit
6,305
Sales Discount
195
Accounts Receivable
6,500
Recorded invoice paid by SK Stores less discount
b) Prepare the cost of goods sold section for the month of January.
Cost of Goods Sold
Beginning inventory
$200
Net Purchases
$5,851
Cost of Goods available for Sale
6,051
Less: Ending inventory
674
Cost of Goods Sold
5,377
Net Purchases:
Purchases
$6,000
Less: Purchase Returns and allowances

Purchase Discounts
$30
119
Net Purchases
5,851
AP-51 ( 9 )
Crystal Crockery has provided you with the following information about the transactions
occurring in March:
148
Mar 2
Crystal Crockery received a shipment of gift mugs for resale from Cup
Makers Inc. The amount on the invoice is $7,000 and the stated terms
are: 2/15, n/45.
Mar 2
Crystal Crockery paid $400 cash for shipping charges.
Mar 5
The manager of Crystal Crockery performed a check on the shipped

cups and found that goods worth $700 were defective. The defective
goods were returned to the supplier.
Mar 13
Crystal Crockery paid the remaining invoice balance and, in doing so,
took advantage of the early payment discount.
Mar 20
Crystal Crockery sold the goods costing $6,227 to AS Supermarket for

$9,500.
Chapter 4
Inventory
Mar 22
AS Supermarket found 10% of items to be defective and returned

these to Crystal Crockery.
Mar 28
The invoice showed terms 2/10, n/60. AS Supermarket paid the

remaining invoice balance after taking advantage of the early
settlement discount.
Opening inventory balance was $500 and the closing inventory balance was $875.
Required:
Assume Crystal Crockery uses the periodic inventory system:
a) Prepare the journal entries to record the purchase and sales transactions.
Date
Mar 2

Purchases
Debit
Credit
7,000
Accounts Payable
7,000

Mar 2
Freight-in
400
Cash
400
Record Freight-in charges

Mar 5
Accounts Payable
700
700
Returned defective goods to supplier

Mar 13
Accounts payable
6,300
Cash
6,174
Purchase Discount
126
Paid remaining invoice balance less discount received for

early payment
Mar 20
Accounts Receivable
9,500
Sales
9,500

Mar 22

Accounts Receivable
950
950
Defective goods returned by the buyer
149
Chapter 4
Inventory
Date
Mar 28
Debit
Cash
Credit
8,379
Sales Discount
171
Accounts Receivable
8,550
Recorded invoice paid by AS Supermarket less discount
b) Prepare the journal entries to record the end of period adjustments.

Date
Mar 31
Debit
Revenue
Credit
9,500
Inventory
847
Purchase Return and Allowances
700
Purchase Discounts
126
Income Summary
11,173
To close revenue and other Income statement credit balance

accounts and to set up ending inventory balance for the period
Date
Mar 31
Debit
Income Summary
Credit
9,021
Inventory
500
950
Sales Discounts
171
Purchases
7,000
Freight - in
400
To close expense and other debit balance income statement

accounts and to remove beginning inventory for the period
c) Prepare the cost of goods sold section of the income statement.

Cost of Goods Sold
Beginning inventory
$500
Net Purchases
6,174
Freight- in
400
6,574
7,074
847
Cost of Goods Sold
6,227
Net Purchases:
Purchases
Less: Purchase Returns and allowances
Purchase Discounts
Net Purchases
150
$7,000
700
126
826
6,174
Chapter 4
Inventory
AP-52 ( 5 )
MJ Corporation sells three categories of products Alpha, Beta and Gamma. The following
information was available at year end:
Alpha
Beta
Gamma
$ per unit
$ per unit
$ per unit
Original cost
10
13
15
Estimated selling price (Market)
15
12
14
Inventory: number of units held
300
380
240
Required:
a) Calculate the value of inventory (apply the LCM principle at the category level).
Alpha
Beta
Gamma
Inventory: units held
300
380
240
Lower of cost and market
$10
$12
$14
$3,000
$4,560
$3,360
Value of inventory
Total value of inventory = $3,000+4,560+3,360 = $10,920

b) Using the results from a), prepare the journal entry to adjust inventory to LCM (at category
level).
Date
Debit
Cost of Goods Sold

Inventory
Credit
620
620
To adjust inventory to LCM (category level)
Original cost = $10 x 300 + $13 x 380 + $15 x 240 = $11,540

Adjustment = $11,540 - $10,920 = $620
AP-53 ( 3 )
An inventory record card for item A 903 shows the following details:
March 1
60 units in opening inventory at a cost of $70 per unit
March 9
130 units purchased at a cost of $65 per unit
March 18
70 units sold
March 24
40 units purchased at a cost of $80 per unit
March 29
100 units sold

151
Chapter 4
Inventory
Required:
The company uses the perpetual inventory method. Calculate the value of inventory at
each of the above dates and determine the ending inventory at the end of March using the
following methods:
(a) FIFO
(b) Weighted average cost method
(a) FIFO
FIFO
Unit
cost
Quantity
bought
Value of
purchase
Units
sold
Inventory
count
Value of inventory
1.
A 903
$70
60
$4,200
60
$4,200
(60 x $70)
2.
A 903
$65
130
$8,450
190
$12,650
($4,200+8,450)
3.
Sold A 903
120
$7,800
(120 x $65)
4.
A 903
160
11,000
$7,800 + 3,200
5.
Sold A 903
60
$4,500
(40 x $80 + 20 x $65)
70
$80
40
3,200
100
Ending inventory
$4,500
(b) Weighted average cost method

Average Cost
Unit
cost
Quantity
bought
Value of
purchase
Inventory
count
Value of inventory
1.
A 903
$70
60
$4,200
60
$4,200
(60 x $70)
2.
A 903
$65
130
$8,450
190
$12,650
($4,200+8,450)
Evaluate average cost

3.
Sold A 903
4.
A 903
Evaluate average cost
5.
Sold A 903
Ending inventory
152
Units
sold
$12,650 (value) / 190 (A -903) = $66.57

70
$80
40
3,200
120
$7,989
(120 x $66.57)
160
$11,189
($7,989+3,200)
$11,189 (value) / 160 (A -903) = $69.93

100
60
$4,196
(60 x $69.93)
$4,196
Chapter 4
Inventory
AP-54 ( 4 )
Trevor and Arkady run Squash Stuff Inc. The net income earned by their business during the
year ended December 31, 2008 is $250,000. However, an inventory clerk realized that the
ending inventory for 2008 was overstated by $10,000.
Required:
a) If the error is not corrected for, what would be the effect on 2008 net income?
Net income for the year 2008 would have been overstated by $10,000 since an overstated
closing inventory would lead to a lower cost of goods sold, which leads to a higher net
income.
b) If the error is not corrected for, what would be the effect on the 2008 equity balance?
The 2008 equity balance would have also been overstated by $10,000.
c) Record journal entries to correct the overstatement of inventory assuming that error was
discovered in 2008.
Date

Cost of Goods Sold
Inventory
Debit
Credit
10,000
10,000
Corrected overstated inventory
d) If the error is not corrected for, how would the sum of 2008 and 2009 net income be
affected?
Since the overstatement of ending inventory in 2008 (therefore higher profits) leads to an
overstated beginning inventory in 2009 (therefore lower profits), the total income of 2008
and 2009 will not be affected by the overstatement of ending inventory in 2008. The income
in the individual years, however, will be affected (overstatement of profits in 2008 and
understatement of profits in 2009).
153
Chapter 4
Inventory
e) There have been cases where companies who are applying for bank loans have
intentionally overstated their closing inventory. Why would companies overstate their
closing inventory? and what are some of the methods of overstating closing inventory?
By intentionally overstating closing inventory, COGS is understated which overstates net
income. Having a higher net income may make it easier for the company to obtain the loan.
A company could overstate inventory by overstating the value of obsolete inventory (which,
under normal circumstances, would have to be written down). The company could also
attribute various overhead production costs to inventory when, in fact, those overhead costs
do not relate to the product.
AP-55 ( 6 )
Fine Grocery Store has been buying and selling grocery items for many years. During the
month of January, some inventory was lost due to an accidental fire in the store. The following
amounts have been extracted from the accounts of Fine Grocery Store:
Sales
Beginning Inventory
Purchases
Inventory in good condition after fire
$280,000
$210,000
340,000
300,000
Gross Profit Margin
30%
Calculate the amount of inventory lost due to the fire by calculating the amount of COGS
using the gross profit method.
Statement of Cost of Goods Sold
Beginning inventory
Net Purchases
Less: Cost of Goods Sold ($280,000 *70%)
Inventory lost by fire
$210,000
340,000
550,000
300,000
196,000
54,000
AP-56 ( 6 )
The following information has been provided by AS Retailers for the month of August.
Calculate the estimated closing inventory at cost using the retail method.
At Cost
At Retail
Cost of Goods sold

Opening inventory
Purchases
Goods available for sale
Sales at retail
Closing inventory at retail
154
3,000
32,000
35,000
6,000
80,000
86,000
50,000
36,000
Chapter 4
Inventory
Closing inventory at cost

= Closing inventory at retail
= $ 36,000
Cost of Goods Available for Sale at Cost

Cost of Goods available for Sale at Retail
35,000
86,000
= $14,651
AP-57 ( 3 )
GB, a bookseller, had the following transactions during the month of August and uses the
perpetual inventory system:
Aug 1
Novels
Bought 10 novels at $30 each
Aug 2
College bags
Bought 10 bags at $45 each
Aug 5
Novels
Sold 5 novels
Aug 10
Pencil case
Bought 15 at $5 each
Aug 21
College bags
Sold 3 bags
Required:
a) Calculate the value of inventory at each date using the specific identification method.
Clearly show August ending inventory.
Specific
identification
Unit
cost
Quantity
bought
Value of
purchase
Units
sold
Inventory
count
Value of
inventory
1.
Novels
$30
10
$300
10
$300
2.
College Bags
$45
10
$450
20
$750
$300+450
3.
Sold novels
25
$600
(5 x $30) +$450
4.
Pencil case
40
$675
$600+75
5.
Sold College bags
37
$540
(5x$30)+(7 x $45) +$75
Ending inventory
5
$5
15
$75
3
$540
155
Chapter 4
Inventory
b) Calculate the COGS.

Item sold
Units sold
Cost / unit
COGS
Novels
$30
$150
College bags
45
135
$285
AP-58 ( 7 )
A list of relevant inventory numbers from SI Company for the year ended December 31, 2008
is provided below:
Average inventory December 31, 2007
$90,000
Average inventory December 31, 2008
110,000
Cost of Goods Sold 2007
920,000
Cost of Goods Sold - 2008
980,000
Required:
a) Calculate the following ratios for SI company for the two years.
Inventory turnover ratio
Inventory days on hand ratio
2008
2007
Inventory turnover ratio
8.9
10.22
Inventory days on hand
41
35
b) Compare the results between two years. What conclusion can be drawn about the
performance of the company regarding both years?
A higher turnover ratio shows that a company can quickly sell its inventory on hand. Since in
2007, the company had a higher turnover ratio, it was selling its inventory faster. Therefore,
the performance of SI Company in 2007 is better as compared to 2008. Moreover, the
inventory days on hand ratio has increased from 35 to 41 days which shows that that it takes
more time for the company to move its inventory in 2008 compared to 2007.
156
Chapter 4
Inventory
Case Study
CS-1 ( 2 , 3 , 5 , 6 )
1. Record the following for a company using a perpetual inventory system (using FIFO).
The company has no widgets in its opening inventory.
a)
b)
c)
d)
e)
Purchase of 1,000 widgets at $20 each on credit

Sale of 900 widgets at $55 each for cash
Purchase of 500 widgets at $25 each on credit
Sale of 100 widgets at $60 on credit
Sale of 300 widgets at $50 each for cash
2. Prepare the perpetual inventory record for the preceding transactions. The company
uses FIFO inventory methods.
3. Prepare a statement showing Sales, Cost of Sales and Gross Profit.
4. The company physically counted and valued the inventory, and prepared the following
table. Complete the table using individual item LCM methods.
5. Record the journal entry to adjust the value of inventory to lower of cost or market
based on individual items using the results from #4 above.
6. Sales for the following interim period are $100,000 and purchases were $68,500.
Calculate the gross profit margin and prepare an interim statement for the period,
using the gross profit method to estimate inventory. (Use the information from your
previous answers)
157
Chapter 4
1.
Inventory
Date
a.
Debit
Inventory (1,000 x $20)
Credit
20,000
Accounts Payable
20,000
To record purchase of widgets on credit

b.
Cash (900 x $55)
49,500
Sales
49,500
Cost of Goods Sold (900 x $20)
18,000
Inventory
18,000
To record sale of widgets for cash

c.
Inventory (500 x $25)
12,500
Accounts Payable
12,500
To record purchase of widgets on credit

d.
Accounts Receivable (100 x $60)
6,000
Sales
6,000
2,000
Inventory
2,000
To record sale of widgets on credit

e.
Cash (300 x $50)
15,000
Sales
15,000
7,500
Inventory
7,500
To record sale of widgets for cash
2.
Inventory Sub Ledger Account

Purchase / Sales
Date
Description
Quantity
Amount
Opening Inventory
Purchase
Quantity
Amount
1,000
20,000
1,000
20,000
-900
-18,000
100
2,000
Purchase
500
12,500
600
14,500
Sale
-100
-2,000
500
12,500
Sale
-300
-7,500
200
5,000
Sale
158
Quantity on Hand
Chapter 4
Inventory
3.
Sales
49,500 + 6,000 + 15,000
$70,500
Cost of Goods Sold

18,000 + 2,000 + 7,500
$27,500
Gross Profit
$43,000
4.
Lower of Cost or Market Applied to

Description
5.
Category
Cost
Widget A
Widgets
3,000
2,700
2,700
Widget B
Widgets
2,000
3,300
2,000
Total Widgets
5,000
6,000
Total
5,000
6,000
Date
Market
Individual

Cost of Goods Sold
Category
Total
5,000
4,700
5,000
Debit
5,000
Credit
300
Inventory
300
To record adjustment of inventory to Lower of

Cost or Market (Widget A: $3,000 - $2,700)
6.
Sales ($49,500 + $6,000 + $15,000)
$70,500
Cost of Goods Sold

Opening Inventory
$0
Purchase ($20,000 + $12,500)
32,500
32,500
Closing Inventory
Cost of Goods Sold
Gross Profit
4,700
27,800
$42,700
Calculation of gross profit percent:

Gross profit margin = 42,700 70,500 = 61%
Use gross profit percent in estimated statement.
159
Chapter 4
Inventory
Sales
$100,000
Cost of Goods Sold

Opening Inventory (from previous period's closing)
$4,700
Purchases
68,500
73,200
Closing Inventory (73,200 - 39,000)
34,200
Cost of Goods Sold ($100,000 - 61,000)

Gross Profit ($100,000 x 61%)
*Minor differences in answers may arise from rounding differences
160
39,000
$61,000
Chapter 4
Inventory
Critical Thinking
CT-1 ( 5 , 6 , 7 )
1. Lower of cost and market may be calculated using one of three methods. Which
method is best? Support your answer.
2. Inventory can be estimated using the gross profit method or the retail method.
Counting and valuing inventory can be an expensive process (labour cost, closing
retail stores while count is underway, etc.) Is it necessary to count and value inventory
when it can be estimated? Explain your answer.
3. Profits can be easily manipulated by management by misstating the amount of
inventory. Discuss the methods by which management can report incorrect inventory
amounts, and the means by which such errors can be eliminated, or at least, reduced.
Students
will come up with many different ideas. For item 3, inventory should be counted on
______________________________________________________________________________
a______________________________________________________________________________
regular (yearly) basis to ensure that the estimates are correct.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
161
Chapter 4
Notes
162
Inventory

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Chapter 4

Account Title and Explanation

Record the purchasing of inventory

Account Title and Explanation

Record the payment to Super Shirt Wholesalers

Account Title and Explanation

Record the purchasing of Inventory

Account Title and Explanation

Record the purchase return

Account Title and Explanation

Purchase Returns and Allowances

Record the purchase return

Account Title and Explanation

Record the purchase return

Account Title and Explanation

Record the purchase return

Account Title and Explanation

Record the purchasing of Inventory

Account Title and Explanation

Allowance for goods with wrong colour

Account Title and Explanation

Payment for the goods

Account Title and Explanation

Record the purchasing of Inventory

Account Title and Explanation

Purchase Returns and Allowance

Allowance for goods with wrong colour

Account Title and Explanation

Payment for the goods

Account Title and Explanation

Record the purchase

Account Title and Explanation

Paid Invoice owing less discount received

Account Title and Explanation

Account Title and Explanation

Record the purchase

Account Title and Explanation

Paid Invoice owing less discount received

Account Title and Explanation

Record the payment to Jogger Wear Supplies

Account Title and Explanation

Record the purchase of inventory plus

b) If Cup-A-Java decided to take advantage of the early payment cash discount, by

Account Title and Explanation

Paid invoice owing less discount received for early

Account Title and Explanation

Account Title and Explanation

Record the purchase return

Account Title and Explanation

Paid invoice owing less discount

Account Title and Explanation

Purchased inventory on account

Made sales on account

a) As Macks bookkeeper prepare the journal entries to reflect the return.

Account Title and Explanation

Record sales returns for unsatisfactory products

Restock inventory return

Account Title and Explanation

Record sales returns for unsatisfactory products

Restock inventory return

Account Title and Explanation

Collected outstanding accounts receivable