Question

Questions (10 points) 1. Briefly contrast the accounting procedures in perpetual and periodic inventory systems. ( points 2. The December bank statement for Kowal Publishing Co. reports a balance of $13,847.59 at December 31, 2018. Kowal's accounting records, however, show a balance of $15,245.47 in the same bank account prior to preparation of the bank reconciliation. Which amount should be included in the amount of cash reported in Kowal's balance sheet at December 31, 2018? Explain your answer. (5 points) Problem 1 (25 points) Jordan's Boutique is a retail clothing store for men & women. The store operates out of a rented building in Malaga, Spain. The following is the store's adjusted year-end trial balance dated December 31, current year. $ $ $ 21,888 3.744 25,200 2,592 1,296 59,040 Cash Accounts receivable Merchandise inventory Prepaid rent Office supplies Office equipment Accumulated depreciation: office equipment Accounts payable Sales taxes payable Capital stock Retained earnings Sales 17,280 18,360 4,608 25,920 30,312 325,440 $ www.euruni.edu

Answer 1

Answer-1:

Perpetual inventory system provides a running balance of cost of goods available for sale and cost of goods sold. Under this system, no purchases account is maintained because inventory account is directly debited with each purchase of merchandise. The expenses that are incurred to obtain merchandise inventory increase the cost of merchandise available for sale. These expenses are, therefore, also debited to inventory account. Examples of such expenses are freight-in and insurances etc. Each time the merchandise is sold, the related cost is transferred from inventory account to cost of goods sold account by debiting cost of goods sold and crediting inventory account.

Journal Entries in a Perpetual Inventory System are as follows:

Credit Debit XXX Account Name Inventory Account payable/Cash (When goods are purchased) XXX XXX Inventory Account payable/Cash When expenses such as freight-in, insurance etc. are incurred XXX | XXX Account payable Inventory When goods are returned to supplier XXX XXX XXX Account receivable Sales Cost of goods sold Inventory When goods are sold to customers: XXX XXX XXX XXX Sales Account receivable Inventory Cost of goods sold When goods are returned by customers XXX XXX XXX XXX Inventory over/shot Inventory When a difference between the balance of inventory account and physical count of inventory is found

Under periodic inventory system inventory account is not updated for each purchase and each sale. All purchases are debited to purchases account. At the end of the period, the total in purchases account is added to the beginning balance of the inventory to compute cost of goods available for sale. The ending inventory is determined at the end of the period by a physical count and subtracted from the cost of goods available for sale to compute the cost of goods sold.

The general formula to compute cost of goods sold under periodic inventory system is given below:

Cost of goods sold (COGS) = Beginning inventory + Purchases – Closing inventory

Journal Entries in a Periodical Inventory System are as follows:

Credit Debit XXX Account Name Purchases Account payable/Cash (When goods are purchased) XXX Freight-in Insurance Cash XXX XXX XXX When expenses such as freight-in, insurance etc. are incurred XXX Account payable Purchase return and allowance When goods are returned to supplier XXX XXX Account receivable Sales When goods are sold to customers: XXX I XXX Sales return and allowances Account receivable When goods are returned by customers XXX XXX XXX Inventory (Ending inventory) Cost of goods sold (Bal. Fig) Purchases Inventory (Beginning inventory) At the end of the period XXX XXX

Answer-2:

Neither the amount on the bank statement nor the balance in the accounting records is the appropriate amount to include in the balance sheet with respect to this bank account. The amount to be included in cash reported in the balance sheet is the adjusted cash balance determined in the bank reconciliation, and which usually is different from both the balance per bank statement and the balance per depositor's records.

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