BKAR1013 : FINANCIAL ACCOUNTING AND REPORTING I(A181)

MINI CASE 4 : INVENTORY

DUE DATE : 25/10/18 (THURSDAY)

QUESTION 1

Discuss where, if at all, should the following items be classified on a statement of financial
position?
(a) Goods in transit that were recently purchased FOB destination
(b) Land held by a real estate firm for sale
(c) Raw materials
(d) Goods received on consignment
(e) Stationery supplies

QUESTION 2

What is the difference between the first-in, first-out method and the weighted average method
of assigning cost? During periods of rising prices, the use of FIFO (as compared with average
cost) will result in what effect on the financial statements?

QUESTION 3

The following information relates to the inventory of Bride Co for the month of July 2017.
The inventory system of the company is a perpetual inventory system.

Purchase records: Units sold during the month:

2 July 100 units@ RM10.00 10 July 80 units@ RM12.00
11 100 units @ RM 9.80 14 100 units@ RM 11.50
16 50 units @ RM9.60 30 90 units@ RM 11.70
24 100 units @ RM9.40

Assume that there are no opening inventories.

REQUIRED:

(a) Determine the cost of goods sold and ending inventory for the period ended 31 July 2017
under two different valuation methods:
(i) FIFO
(ii) Weighted Average
Show your workings clearly by following the given format:

Purchases Cost of goods sold Ending balance

Unit Total cost Total cost Unit Total cost
Date Unit Unit Unit Cost Unit
Cost (RM) (RM) Cost (RM)

(b) Give ONE (1) advantage for each of the valuation method.
(c) State how each of the following transactions should be presented in the company’s
statement of financial position or statement of comprehensive income:

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 i. Interest costs incurred for inventories that are routinely manufactured.
ii. Goods in the company are consigned at another company’s store.
Goods that the company purchased are under F.O.B. destination and they are in transit as
at the year end.

QUESTION 4

Syarikat Alma Meter Bhd (SAMB) just recently hired a new assistant, Encik Subki Muda to
help company’s inventory controller in inventory costing and management. Although Encik
Subki understands the sophisticated computer inventory control systems, however he is not
familiar with the SAMB inventory system and has little knowledge of how inventory cost is
determined. SAMB has two types of inventories, Model B1 and Model Z2. In studying the
records of SAMB, Encik Subki was provided with the incomplete schedule to show how the
cost of inventories on hand at 31 December 2016 and the cost of sales for the month of
December 2016 are computed for the Model B1. SAMB uses net method to record the
purchase and account payable. The company's reporting period ends on 31 December.

Incomplete schedule of inventory on hand and cost of sales of unit inventory Model B1
Purchases Cost of sales Ending balance
Total Total Total
Unit Unit Unit
Date Detail Unit cost Unit cost Unit cost
Cost Cost Cost
(RM) (RM) (RM)
Beginning
1-Dec 40 350 14,000
inventories

2-Dec Purchase 30 400 12,000 40 350 14,000

Freight Cost 360 30 412 12,360
12,360 70 26,360
Cost per unit 412
9-Dec Sold 40 350 14,000 0 350 0
5 412 2,060 25 412 10,300
45 16,060 25 10,300
11-Dec

Notes: The information for inventory transaction that took place on 11 December 2016 and
onwards is as follows:

Date Detail
11 Dec Returned two units of Model B1 to the supplier. These units were recently
purchased on 2 December 2016.
15 Dec Sold 15 units of Model B1 for RM600 each.
20 Dec Purchased three units of Model Z2 for RM6,000 each. Additional costs incurred
include RM830 cost on freight.
21 Dec Two defect units of Model B1 were returned by a customer. These units were
identified as released for sale from the beginning inventory on 1 December 2016.
23 Dec Sold 2 units of Model Z2 at RM8,500 each.
25 Dec Purchased 11 units of Model B1 for RM400 each. The purchase was on credit
with 2/10, n/60 term.

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REQUIRED:

(a) Based on the schedule and the information provided, assume that you are in the
position of Encik Subki as an inventory controller assistant. Therefore the controller
asks you to find the following information:

(i) What is the type of inventory system used by SAMB? Give ONE (1) justification
for your answer.

(ii) What is the cost flow assumption applied by SAMB to measure the cost of
inventory? Give ONE (1) justification for your answer.

(iii) What is the freight term applied to determine ownership of inventory for the
purchase on 2 December 2016? Give ONE (1) justification for your answer.

(b) Prepare a schedule, starting with the transaction at 11 December 2016 to calculate the
cost of inventory on hand at 31 December 2016 and the cost of sales for the month of
December 2016 for the item Model B1.

(c) Calculate the gross profit of Model B1 for the month of December 2016.

(d) Suggest the appropriate cost flow assumption that can be used by SAMB for the
Model Z2 if this model is small in its quantity and easily distinguishable. Give TWO
(2) examples of products that suitable with the suggested cost flow assumption.

QUESTION 5

Viral Bhd’s record of transactions for the month of June 2017 was as follows:

Purchases Sales
June 1 (balance on hand) 600 @ RM3.00 June 3 500 @ RM5.00
4 1,500 @ 3.04 9 1,300 @ 5.00
8 800 @ 3.20 11 600 @ 5.50
13 1,200 @ 3.25 23 1,200 @ 5.50
21 700 @ 3.30 27 900 @ 6.00
29 500 @ 3.13 4,500
5,300

REQUIRED
(a) Assuming that periodic inventory records are kept, compute the inventory at
June 30 using (1) FIFO and (2) average cost.
(b) Assuming that perpetual inventory records are kept in both units and dollars, determine
the inventory at June 30 using (1) FIFO and (2) moving average cost.