Week 8 Tutorials

Chapter 6: Accounting for retailing

2. The perpetual inventory system is superior to the periodic system. Discuss.

Problem 6.17
Journal entries, discounts, closing entries and income statements — both perpetual and
periodic inventory systems
GST version

Clara’s Chairs buys chairs for $80 each and sells them for $140 each. On 1 August 2022,
86 chairs were in inventory. Clara’s Chairs completed the transactions below during August.

A physical inventory count taken on 31 August 2022 showed 63 chairs in stock.

Required
(a) In two columns and assume the business is registered for the GST, prepare general
journal entries to record the transactions assuming:
i. a perpetual inventory system is used
ii. a periodic inventory system is used. Narrations are not required.
(b) Assuming Clara’s Chairs closes its accounts at month end; prepare relevant entries to
close the accounts under both inventory systems.
(c) Prepare two separate income statements showing gross profit and profit for August,
assuming that:
i. the perpetual inventory system was used
ii. the periodic inventory system was used.
(LO3, LO4, LO5 and LO6)

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Chapter 13: Inventories
1. Must a company use the inventory costing method that best conforms to the actual
physical movement of the goods? Explain.

2. Why is the lower of cost and net realisable value rule required by accounting standards?
Is it permissible to revalue inventories upwards? If so, when? Are there any limits to
revaluation?

Exercise 13.3

Lower of cost and net realisable value

The inventory of Simmonds Ltd contains the following packs of nuts and bolts at 30 June 2022.

Unit Price

Quantity of Cost per

Item #1254 113 $3.50 $3.00

Item #7231 45 4.95 6.95

Item #8853 30 9.95 8.50

Item #7699 75 2.95 3.95

Item #3420 60 7.95 6.95

Item #6588 25 9.95 8.50

Required

(a) Determine the ending inventory value at 30 June 2022, applying the lower of cost and net
realisable value rule to the individual items.
(b) What effect did application of the rule, rather than cost, have on the financial statements of the
company?
(LO5)

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Exercise 13.5

Inventory cost methods — perpetual inventory system

GST version

The following information relates to the inventory of the Lighting Warehouse Ltd during the month of
August: (Note, purchases are GST Inclusive)

August 1 Beginning Inventory 60 units @ $11

12 Purchased 90 @ $13.20

15 Sold 80 units

21 Purchased 120 @ $14.30

22 Sold 100 units

28 Sold 65 units

Lighting Warehouse Ltd uses the perpetual inventory method of accounting for inventory. Ignore GST.

Required

Determine the cost of the ending inventory. Note a phusical stocktake verified inventory records
reflected ending stock levels. The manager of Lighting Warehouse Ltd is evaluating inventory
valuation methods and is seeking your assistance to calculate the value of closing inventory and cost
of goods sold for each of the following methods:

(a) FIFO
(b) LIFO
(c) Moving average; note, round unit cost to the nearest cent.
(d) Specific identification – records identified the ending inventory consisted of 5 units
from beginning inventory, 12 units from the purchase on 12 August and the remaining
from the purchase on 21 August.
(LO3)

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Exercise 13.6

FIFO and average cost flow methods — periodic and perpetual inventory systems

GST version
Steele Security Systems Ltd sells home security and surveillance systems. The table below
summarises the inventory movements for the most popular model of camera used in their home
security systems. (All purchases of inventory are GST Inclusive)

July 1 Beginning Inventory 55 @ $250 = $ 13 750

Aug. 15 Sales 40

Sept. 2 Purchases 90 @ $280.50 = 25 245

Nov. 10 Sales 35

Dec. 19 Sales 25

Feb. 21 Purchases 85 @ $282.70= 24 029.50

Mar. 28 Sales 42

May 31 Sales 55

Required
(a) Using the weighted average costing method for periodic inventory, calculate the cost of
sales and closing value of inventory to be presented in the financial reports for the year
ended 30 June 2023.
(b) Using the moving average method costing inventory under perpetual inventory, calculate
the cost of sales and closing value of inventory to be presented in the financial reports for
the year ended 30 June 2023.
(c) Using a periodic system and the FIFO method of valuing inventory, calculate the cost of
sales and closing inventory to be presented in the financial reports for the year ended 30
June 2023.
(d) Using a perpetual system and the FIFO method of valuing inventory, calculate the cost
of sales and closing inventory to be presented in the financial reports for the year ended
30 June 2023.
(e) Compare the results generated for the inventory valuation methods for the requirements
completed in (a), (b), (c) and (d) above. What are the main differences?