Question

Answer BOTH parts to this question. Each part is independent. Part A: (10 marks) Newco Inc. began business on June 1. 2019. Newco is a small business that uses a periodic inventory control system. The bookkeeper recently received a report from an independent outside firm stating that the ending inventory balance on June 30 was $1.4.6.60. However, according to the bookkeeper's records, the inventory balance at month end was $1,517.50. The bookkeeper has rechecked her records several times and still comes up with the same amount. She believes that the difference between the two amounts must be due to inventory Sunnase Based upon a physical count, there were 70 units on hand at the end of the month. Listed below are the company's purchases for the month: Purchase Units 40 vau AWN- Unit Cost $20.00 21.00 20.50 20.00 19.00 22.00 21.50 Required: Write an explanation for the bookkeeper as to why the bookkeeper's calculation of ending inventory ($1,517.50) differs from the calculation made by the independent outside firm ($1,426.60). Support your explanation with calculations.

Answer 1

A)

The independent outside firm has used the weighted average inventory valuation method for valuation of closing stock whereas the bookkeeper used the FIFO method of inventory valuation.

That is the reason why the independent outside firm closing inventory balance as per weighted average is 1426.6 and bookkeepers' balance is 1517.5 which is as per FIFO.

Below are the supporting calculation

Weighted average
Units	Unit cost	Total cost
40	20	800
50	21	1050
60	20.5	1230
75	20	1500
90	19	1710
50	22	1100
45	21.5	967.5
410		8357.5
Average price (8357.5/410)		20.38
Closing units		70
Closing inventory		1,426.60

Under FIFO
Units	Unit cost	Total cost
25	22	550
45	21.5	967.5
Closing inventory		1517.5

B)

1. Cost of inventories

Inventory cost should include the cost of purchase, cost of conversion and all other costs to bring inventory to the present location and condition.

2. Measurement

Inventory should be valued at lower of cost and net realizable value.       

3. Method of valuation of inventory

Inventory valuation methods are FIFO, LIFO and weighted average.

Inventories value as well the cost of goods sold values vary depending on the method used to value inventory.

The method of inventory valuation impacts inventory as well cost of goods sold.