Discussion questions

13.4Critically examine the following statement: 'During times of high inflation, the LIFO cost assumption should be permitted in financial statements because it allows the entity to show a more up-to-date profit figure.'

Exercise 13.5

Inventory cost methods perpetual inventory system

Non-GST version

The following information relates to the inventory of Gadgets Ltd during May.

Gadgets Ltd uses a perpetual inventory system. Ignore GST.

Required

Determine the cost of the ending inventory (assuming there have been no stock losses) and the cost of sales, using the following three methods:

(a) the moving average; round unit cost to the nearest cent.

(b) specific identification; assume that the ending inventory on 31 May consisted of 13 units from the beginning inventory, 24 units from the 3 May purchase, and the remainder from the 10 May purchase.

(c) FIFO.

(LO3)

Problem 13.16

Inventory cost flow methods periodic inventory system

Non-GST version

The following information relates to the inventory of Margaret's Megamart Ltd during December. Ignore GST.

Margaret's Megamart Ltd uses the periodic inventory system. During the month, 1300 units were sold for $5525. A physical count on 31 December verified that 700 units were on hand.

Required

(a)Prepare an income statement down to gross profit for December, using each of the following costing methods:

i.specific identification, assuming that 400 units were sold from the beginning inventory, 400 units were sold from the first purchase, 200 units were sold from the 15 December purchase, and the remainder from the 23 December purchase.

ii.FIFO

iii.LIFO

iv.weighted average.

(b)Which cost flow method(s) resulted in the highest gross profit on sales? the highest ending inventory? Explain your results.

(c)Prepare an income statement down to gross profit for December, using the FIFO and LIFO costing methods and assuming that the 23 December purchase had been delayed until January.

(d)The management of Margaret's Megamart Ltd expects the unit cost to increase to $3.90 excluding GST early in the next period. In anticipation of the price increase, a purchase of 600 additional units was made on 29 December at a unit cost of $3.65 excluding GST. Prepare an income statement down to gross profit for December, using the FIFO and LIFO costing methods.

(e)Compare your results obtained in requirements A, C and D. Explain why your results are or are not the same.

(LO2, LO4 and LO9)

Problem 13.20

Lower of cost and net realisable value

Non-GST version

The following information applies to the inventory of Carson's Camera Store as at 30 June 2019.

Required

(a) Calculate the ending inventory value as at 30 June 2019, applying the lower of cost and net realisable value rule to:

i. individual inventory items

ii. major categories of cameras and video equipment

iii. total inventory.

(b) What effect does application of the lower of cost and net realisable rule have on the financial statements of the business?

(c) Assume that at the end of the next financial year, 12 units of model A-4 are still on hand and the net realisable value is $80 per unit. How would this increase in net realisable value affect the inventory value of the 12 units.

(d) How would the increase in net realisable value in requirement C be treated in the accounting records?

(LO5)