Question

7. The following units of a particular item of Sejahtera Enterprise were available for sale during fiscal year 2018: 

Beginning inventory  150 units at RM75

Sale                         120 units at RM125

First purchase            400 units at RM78

Sale                          200 units at RM125

Second purchase         300 units at RM80

Sale                           290 units at RM125 

There are 240 units of the item on hand at the end of fiscal year 2018. 

Required: 

(a) Determine, for fiscal year 2018, the total cost of the ending inventory and cost of goods sold under each of the inventory valuation method: FIFO, LIFO, and average cost method, if the firm applies: (i) Perpetual inventory system (ii) Periodic inventory system 

(b) Which inventory system provides the more effective means of controlling inventories? Briefly explain. 

(c) Assuming Sejahtera Enterprise use perpetual inventory system and FIFO inventory valuation method, can the business change its method of inventory valuation for its next business fiscal year? Explain.

Answer 1

(a) Sejahtera Enterprise (i) Perpetual inventory system 1 First in, First out Method Beginning inventory Sale First Purchase Sale Cost of Goods Purchased Cost of Goods Sold Cost of remaining inventory Number of units Unit Cost Total cost Number of units Unit Cost Total cost Number of units Unit Cost Total cost 150 RM75.00 RM11,250.00 120 RM75.00 RM9,000.00 30 RM75.00 RM2,250.00 400 RM78.00 RM31,200.00 30 RM75.00 RM2,250.00 400 RM78.00 RM31,200.00 30 RM75.00 RM2,250.00 170 RM78.00 RM13,260.00 230 RM78.00 RM17,940.00 300 RM80.00 RM24,000.00 230 RM78.00 RM17,940.00 300 RM80.00 RM24,000.00 230 RM78.00 RM17,940.00 60 RM80.00 RM4,800.00 240 RM80.00 RM19,200.00 RM55,200.00 RM47,250.00 Second Purchase Sale Total 2 Last in, First out Method Beginning inventory Sale First Purchase Sale Cost of Goods Purchased Cost of Goods Sold Cost of remaining inventory Number of units Unit Cost Total cost Number of units Unit Cost Total cost Number of units Unit Cost Total cost 150 RM75.00 RM11,250.00 120 RM75.00 RM9,000.00 30 RM75.00 RM2,250.00 400 RM78.00 RM31,200.00 30 RM75.00 RM2,250.00 400 RM78.00 RM31,200.00 200 RM78.00 RM15,600.00 30 RM75.00 RM2,250.00 200 RM78.00 RM15,600.00 300 RM80.00 RM24,000.00 30 RM75.00 RM2,250.00 200 RM78.00 RM15,600.00 300 RM80.00 RM24,000.00 290 RM80.00 RM23,200.00 30 RM75.00 RM2,250.00 200 RM78.00 RM15,600.00 10 RM80.00 RM800.00 RM55,200.00 RM47,800.00 Second Purchase Sale Total

3 Average Method Beginning inventory Sale First Purchase Sale Second Purchase Sale Total Cost of Goods Purchased Cost of Goods Sold Cost of remaining inventory Number of units Unit Cost Total cost Number of units Unit Cost Total cost Number of units Unit Cost Total cost 150 RM75.00 RM11,250.00 120 RM75.00 RM9,000.00 30 RM75.00 RM2,250.00 400 RM78.00 RM31,200.00 430 RM77.79 RM33,450.00 200 RM77.79 RM15,558.14 230 RM77.79 RM17,891.86 300 RM80.00 RM24,000.00 530 RM79.04 RM41,891.86 290 RM79.04 RM22,921.96 240 RM79.04 RM18,969.90 RM55,200.00 RM47,480.10 (ii) Periodic inventory system 1 FIFO - 240 units in ending inventory under FIFO, the units in ending inventory are the one purchased recently Second purchase 240 units @ RM80 = RM19,200 Cost of Goods sold = Beginning inventory + purchases - Ending inventory = RM11,250 + RM55,200 - RM19,200 = RM47,250 2 LIFO - 240 units in ending inventory Under LIFO, the units in ending inventory are the one purchased earliest Beginning inventory 150 units @ RM75 = RM11,250 First purchase 90 units @ RM78 = RM7,020 Ending inventory 240 units RM18,270 Cost of Goods sold = Beginning inventory + purchases - Ending inventory = RM11,250 + RM55,200 - RM18,270 = RM48,180 3 Average cost method - 240 units in ending inventory Under average cost method, the weighted average cost per unit is to computed Total cost = RM66,450 Total units = 850 units Weighted average cost per unit = RM78.18 Total cost of ending inventory = 240 units * RM78.18 = RM18,763.2 Cost of Goods sold = Beginning inventory + purchases - Ending inventory = RM11,250 + RM55,200 - RM18,763.2 = RM47,686.80

Perpetual inventory system Average cost FIFO LIFO method RM19,200.00 RM18,650.00 RM18,969.90 RM47,250.00 RM47,800.00 RM47,480.10 Periodic inventory system Average cost FIFO LIFO method RM19,200.00 RM18,270.00 RM18,763.20 RM47,250.00 RM48,180.00 RM47,686.80 Cost of ending inventory Cost of Goods Sold (b) Under periodic inventory system, inventory is tracked by periodic physical count of evey item in stock. It doesn't track inventory on a day to day basis. Physical counts are either done weekly, monthly, quarterly or yearly depending on the size of the business. However under Perpetual inventory system, inventories are tracked in real-time. They are updated whenever a sale or purchase is made. Through the use of barcodes, POS systems etc, it is possible to track inventory at any time. Thus the perpetual inventory system provides more effective means of controlling inventories. (c') Change in inventory valuation method is the change in accounting principle. It requires full disclosure in the financial statements regarding the facts of the change and the financial effects of the change. The company also needs to restate the past statements to reflect the change in accounting principle.