Question

1a Albert Trading uses the perpetual inventory system. It recorded the following transactions for June.

1 Jun Beginning inventory of 20 units at $80 each
3 Jun Purchased 10 units at $85 each
5 Jun Sold 22 units at $120 each
10 Jun Purchased 15 units at $90 each
17 Jun Sold 10 units at $125 each
25 Jun Sold 5 units at $130 each

Compute the gross profit and ending inventory cost under FIFO method and under weighted average method. Round per unit cost and total cost to 2 decimal places for weighted average method. Show workings.

b. Your friend Amos is running a trading business. His company did not use the perpetual inventory system and he is considering whether he should switch to perpetual inventory system. He showed you the purchases and sales for his company in the last six months (Assume beginning inventory is zero).

Units Unit Cost
Purchases 1 January 400 @ $2,370
8 February 500 @ $2,350
10 March 600 @ $2,370
1 May 200 @ $2,380
15 June 200 @ $2,360

Sales
January 200
February 210
March 210
April 220
May 180
June 210

Using the above information, explain to Amos why he should use perpetual inventory system for his business.

Answer 1

1) FIFO method

   Purchases   Sales   Balance     
Jun-01   Beginning inventory (20 units * 80 = 1600)       20 units * 80 = 1600     
Jun-03   10 units * $85 = 850       20 units * 80 = 1600     
           10 units * $85 = 850     
Jun-05       20 units * $80 = 1600   8 units * $85 = 680     
       2 units * $85 = 170         
Jun-10   15 units * $90 = 1350       8 units * $85 = 680     
           15 units * $90 = 1350     
Jun-17       8 units * $85 = 680   13 units * $90 = 1170     
       2 units * $90 = 180         
Jun-25       5 units * $90 = 450   8 units * $90 = 720     
       COGS = $3080   Ending inventory = $720     

Sales revenue = 22*120 + 10*125 + 5*130 = $4540
COGS = $3080
Gross profit = Sales - COGS = 4540- 3080 = $1460
Ending inventory = $720

2) Weighted average method.

   Purchases   Sales   Balance     
Jun-01   Beginning inventory (20 units * 80 = 1600)       20 units * 80 = 1600     
Jun-03   10 units * $85 = 850       30 units * [(1600+850) / 30)] = 2450     
Jun-05       22 units* $81.67 = 1796.67   8 units * $81.67 = 653.33     
Jun-10   15 units * $90 = 1350       23 units * [(653.33 + 1350) / 23] = 2003.33     
Jun-17       10 units * $87.10 = 871.01   13 units * 87.10 = 1132.32     
Jun-25       5 units * $87.10 = 435.51   8 units * $87.10 = 696.81     
       COGS = $3103.19   Ending inventory = $696.81     

Sales revenue = 22*120 + 10*125 + 5*130 = $4540
COGS = $3103.19
Gross profit = Sales - COGS = 4540- 3103.19 = $1436.81
Ending inventory = $696.81