RUSANGU UNIVERSITY

(A SEVENTH-DAY ADVENTIST INSTITUTION OF HIGHER LEARNING)

SCHOOL OF BUSINESS

ASSIGNMENT ONE

NAME : SARAH PHIRI

ID NUMBER : 20220307

COURSE NAME :

COURSE CODE : ACCT

LECTURER : PRAMILA TADEPALI

DUE DATE : 12th November, 2024

QUESTION: Measurement
1. Types of Inventories in a Manufacturing Company

1. Raw Materials: These are the basic materials and components that are used to produce
goods. For example, in a furniture manufacturing company, raw materials would include
wood, nails, and varnish.
2. Work-in-Progress (WIP): This inventory includes items that are in the process of being
manufactured but are not yet complete. It encompasses all the costs incurred up to that point,
such as raw materials, labor, and overhead.
3. Finished Goods: These are completed products that are ready for sale. Once the
manufacturing process is complete, the items are moved from WIP to finished goods
inventory.

2. Difference between Perpetual and Periodic Inventory Systems

The main difference between a perpetual inventory system and a periodic inventory system lies
in how and when inventory updates are recorded:

Perpetual Inventory System is a system that continuously updates inventory records for every
purchase and sale in real-time. It uses technology like barcodes and point-of-sale systems to
track inventory levels automatically. Whereas Periodic Inventory System this a system that
updates inventory records at specific intervals, such as monthly or annually. Physical counts of
inventory are conducted to determine the ending inventory and calculate the cost of goods sold.

3. Effects on Cost of Goods Sold (COGS) in a Periodic Inventory System

For Esquire Company, which uses a periodic inventory system, the effects on COGS are as
follows:

1. Beginning Inventory: Increase.

2. Purchases: Increase.
3. Ending Inventory: Decrease.
4. Purchase Returns: Decrease.
5. Freight-in: Increase.
4. Four common methods for assigning costs to ending inventory and cost of goods sold:

1. First-In, First-Out (FIFO):

FIFO assumes that the oldest inventory items are sold first. This means the cost of goods sold
is based on the cost of the earliest purchased items, while the ending inventory is valued at
the cost of the most recent purchases. Furthermore, during periods of rising prices, FIFO
results in lower cost of goods sold and higher ending inventory values, leading to higher
reported profits.

2. Last-In, First-Out (LIFO):

LIFO assumes that the most recently purchased items are sold first. This method uses the cost
of the latest purchases for the cost of goods sold, while the ending inventory is valued at the
cost of the oldest items. In times of rising prices, LIFO results in higher cost of goods sold
and lower ending inventory values, which can reduce taxable income.

3. Weighted Average Cost:

This method calculates the cost of goods sold and ending inventory based on the average cost
of all inventory items available during the period. The average cost is determined by dividing
the total cost of goods available for sale by the total units available. The weighted average
method smooths out price fluctuations, resulting in cost of goods sold and ending inventory
values that fall between those calculated using FIFO and LIFO.

4. Specific Identification:

Explanation: This method assigns the actual cost of each specific item to the cost of goods
sold and ending inventory. It is typically used for unique, high-value items like cars or
jewelry, where each item can be individually tracked. Specific identification provides the
most accurate matching of costs to revenues but is impractical for large volumes of similar
items.
5. The journal entries for James Company under both the periodic and perpetual
inventory systems.

1. Periodic Inventory System

THE JOURNAL ENTRIES

FOR JAMES COMPANY
FOR THE MONTH OF OCTOBER 2013.

Date Explanation Debit Credit

a. Purchases $21,560

Accounts Payable $21,560

Purchase of merchandise on
account
Freight-In $500

Cash $500
Freight charges paid in cash
b. Accounts Payable $3,000

Purchases $3,000
Return of merchandise
c. Accounts Payable $21,560

Cash $21,560
Payment for merchandise
purchased
d. Accounts Receivable $28,000

Sales Revenue $28,000

Sale of merchandise on
account
e. Cost of Goods Sold $15,440 $15,440

Inventory $15,440
Adjusting entry to record
cost of goods sold

(Note: COGS = Beginning Inventory + Purchases - Purchase Returns + Freight-In - Ending

Inventory = $15,000 + $21,560 - $3,000 + $500 - $16,060 = $18,000)
2. Perpetual Inventory System

THE JOURNAL ENTRIES

FOR JAMES COMPANY
FOR THE MONTH OF OCTOBER 2013.

Date Explanation Debit Credit

a. Inventory $21,560

Accounts Payable $21,560

Purchase of merchandise on
account
Inventory $500

Cash $500
Freight charges paid in cash
b. Accounts Payable $3,000

Inventory $3,000
Return of merchandise
c. Accounts Payable $21,560

Cash $21,560
Payment for merchandise
purchased
d. Accounts Receivable $28,000

Sales Revenue $28,000

Sale of merchandise on
account $18,000
Cost of Goods Sold
$18,000

Inventory

Cost of goods sold

e. No adjusting entry

e. Adjusting entry for ending inventory (October 31): No adjusting entry is needed for ending
inventory in a perpetual system as it is continuously updated.
6. The journal entries that summarize the transactions that created these balances.

Periodic Inventory System

THE JOURNAL ENTRIES
FOR JOHNSON CORPORATION
FOR THE YEAR OF 2013.

Date Explanation Debit Credit

1. Purchases $155,000

Accounts Payable $155,000

Purchases on account
2. Freight-In $10,000

Cash $10,000
Freight charges paid in cash
3. Accounts Payable $12,000

Purchases $12,000
Merchandise returned to
supplier
4. Accounts Receivable $250,000 $250,000
Sales Revenue
Sales on account $250,000

5. Cost of Goods Sold $148,000 $148,000

Inventory $148,000
End-of-period adjusting entry
for cost of goods sold

(Note: COGS = Beginning Inventory + Purchases - Purchase Returns + Freight-In - Ending

Inventory = $25,000 + $155,000 - $12,000 + $10,000 - $30,000 = $148,000)

Perpetual Inventory System

THE JOURNAL ENTRIES

FOR JOHNSON CORPORATION
FOR THE YEAR OF 2013.

Date Explanation Debit Credit

 1. Purchases $155,000

Accounts Payable $155,000

Purchases on account
2. Inventory $10,000

Cash $10,000
Freight charges paid in cash
3. Accounts Payable $12,000

Inventory $12,000
Merchandise returned to
supplier
4. Accounts Receivable $250,000 $250,000
Sales Revenue
Sales on account $250,000

5. Cost of Goods Sold $148,000 $148,000

Inventory $148,000
End-of-period adjusting entry
for cost of goods sold

In the perpetual system, the inventory account is continuously updated, so no additional end-of-
period adjusting entry is needed for inventory.

7. Altira Corporation uses a periodic inventory and perpetual inventory system.

1. First-In, First-Out (FIFO)

Inventory on Hand:

 August 1: 2,000 units @ $6.10 each

 August 8: 10,000 units @ $5.50 each
 August 18: 6,000 units @ $5.00 each

Sales:

 August 14: 8,000 units

 August 25: 7,000 units

Ending Inventory Calculation:

 Total units available: 2,000 + 10,000 + 6,000 = 18,000 units

 Units sold: 8,000 + 7,000 = 15,000 units
  Ending inventory: 18,000 - 15,000 = 3,000 units

Ending Inventory Value (FIFO):

 3,000 units from the latest purchases:

o 3,000 units @ $5.00 each = $15,000

COGS (FIFO):

 8,000 units @ $6.10 each = $48,800

 7,000 units @ $5.50 each = $38,500
 Total COGS = $48,800 + $38,500 = $87,300

2. Last-In, First-Out (LIFO)

Ending Inventory Calculation:

 Total units available: 18,000 units

 Units sold: 15,000 units
 Ending inventory: 3,000 units

Ending Inventory Value (LIFO):

 2,000 units @ $6.10 each = $12,200

 1,000 units @ $5.50 each = $5,500
 Total ending inventory = $12,200 + $5,500 = $17,700

COGS (LIFO):

 7,000 units @ $5.00 each = $35,000

 8,000 units @ $5.50 each = $44,000
 Total COGS = $35,000 + $44,000 = $79,000

3. Average Cost

Average Cost per Unit:

 Total cost of goods available for sale:

o (2,000 units @ $6.10) + (10,000 units @ $5.50) + (6,000 units @ $5.00)
o Total cost = $12,200 + $55,000 + $30,000 = $97,200
 Total units available: 18,000 units
 Average cost per unit = $97,200 / 18,000 units = $5.40

Ending Inventory Value (Average Cost):

 3,000 units @ $5.40 each = $16,200

COGS (Average Cost):

 15,000 units @ $5.40 each = $81,000

Summary

 FIFO:
o Ending Inventory: $15,000
o COGS: $87,300
 LIFO:
o Ending Inventory: $17,700
o COGS: $79,000
 Average Cost:
o Ending Inventory: $16,200
o COGS: $81,000

8. The cost of goods sold (COGS) for Reuschel Company using the LIFO method under a
periodic inventory system and discuss the financial reporting implications.

1. Calculate Cost of Goods Sold (COGS)

Inventory Details:

 Beginning Inventory: 10,000 units @ $7 each

 Purchases: 50,000 units @ $8.50 each
 Total Units Available: 10,000 + 50,000 = 60,000 units
 Units Sold: 54,000 units
 Ending Inventory: 6,000 units

LIFO Calculation:

 Under LIFO, the most recent purchases are considered sold first.

Units Sold:

 50,000 units @ $8.50 each = $425,000

 4,000 units @ $7 each = $28,000
 Total COGS = $425,000 + $28,000 = $453,000

2. Financial Reporting Implications of LIFO

Problem Created by LIFO:

LIFO Liquidation: When inventory levels decrease, older, lower-cost inventory layers are used
to calculate COGS. This can result in artificially high profits because the older inventory costs
are lower than current costs. This phenomenon is known as LIFO liquidation.

Disclosure Requirements:

LIFO Reserve: Companies using LIFO must disclose the LIFO reserve, which is the difference
between the inventories reported using LIFO and what it would have been under FIFO. This
helps users of financial statements understand the impact of LIFO on the financials. Companies
should also disclose the impact of LIFO liquidation on net income, as it can significantly affect
profitability and tax liabilities.

9. What is a LIFO inventory pool? How the cost of ending inventory is determined when
pools are used?

LIFO Inventory Pool

A LIFO inventory pool groups similar inventory items together to simplify the accounting
process under the Last-In, First-Out (LIFO) method. Instead of tracking the cost of individual
items, companies can manage inventory in pools, which helps mitigate the effects of LIFO
liquidation.

Determining the Cost of Ending Inventory with Pools

1. Identify the Pool: Group similar items into a pool. For example, a company might pool all
electronic components together.
2. Calculate the Total Cost: Determine the total cost of the items in the pool at the beginning
of the period and add the cost of any new purchases during the period.
3. Determine the Cost of Goods Sold (COGS): Apply the LIFO method within the pool to
calculate COGS. This means the most recently purchased items in the pool are considered
sold first.
4. Calculate Ending Inventory: Subtract the COGS from the total cost of the pool to
determine the ending inventory value. The ending inventory will consist of the oldest costs
remaining in the pool.

10. Advantages of dollar-value LIFO compared to unit LIFO:

1. Simplification of Record-Keeping:

Dollar-value LIFO groups inventory into pools based on their dollar value rather than tracking
individual units. This simplifies record-keeping and reduces the complexity of managing large
inventories with numerous items. It allows for easier adjustments for changes in inventory levels
and prices without needing to track each specific item.

2. Better Inflation Adjustment:

Dollar-value LIFO is more effective in adjusting for inflation. By using dollar values, it accounts
for changes in the purchasing power of money over time. This method helps maintain a more
consistent cost of goods sold (COGS) and inventory valuation, providing a more accurate
reflection of the economic reality during periods of inflation.