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1 Inventory Issues: 1- Recording inventory There are two systems (methods) used in recording Inventory Perpetual Inventory system نظام الجرد المستمر 1- Beginning Inventory 100 Units at $6 per unit No Entry 2- purchased 900 units at cost of $6 per unit terms 2/10-n/30 Periodic Inventory system نظام الجرد الدوري Inventory 5400 Purchase 5400 Accounts Payable 5400 Accounts payable Paid Fright Costs On goods Purchased of $100 cash ( Assuming: F.OB Shipping Point ) Inventory 100 Fright In expenses 100 Cash 100 Cash Returned 100 units that is not well for use Accounts payable 600 Accounts Payable 600 Inventory 600 Purchase returns&allow Sold 600 units at $ 12 per unit terms 5/10-n/30 Accounts receivable 7200 Accounts receivable 7200 Sales (600*$12) 7200 Sales 7200 Cost of goods sold (600*$6) 3600 Inventory Paid Fright Costs On goods sold of $200 cash Fright Out Exp 200 Fright out Exp 200 Cash 200 Cash Sales returned of 50 unit Sales Returns and allowance 600 Sales returns & allowance 600 A/R (50*$12) 600 Accounts receivable 600 Inventory 300 Cost of goods Sold (50*$6) 300 Page 1 of 6 Ehab Abdou ( )

2 8- Paid The Amount due for goods purchased less discount Account Payable 4800 Account Payable 4800 Cash 4704 Cash 4704 Inventory 96 purchase Discount Received the Amount due for goods sold less discount Cash 6468 Cash 6468 Sales Discount 132 Sales Discount 132 Account Receivable 6600 Accounts Receivable at end of each period: All companies needs to know: a- The value of ending inventory to be reported in the Statement of financial Position. b- The value of cost of goods sold to be reported in the income statement. To determine the value of ending inventory and the value of cost of goods sold, All companies needs to make an actual count of ending inventory for the following reasons: To verify the inventory records, because this system include inventory account and cost of goods sold account. inventory short is recorded as follows: To compute the cost of ending inventory which is used in computing the cost of goods sold, and make and entry to record them in the system. The entry is as follows: Inventory Short & Over Ending Inventory (By Count) xx Inventory Cost Of goods Sold (Computed)? inventory Over is recorded as follows: Purchase returns (Records) xx Inventory XX Purchase Discount (Records) xx Inventory Short & Over XX Beginning Inventory (Records) xx Short or Over = Actual Inventory Purchase (Records) xx = [+ Over] or [ Short] Fright in (Records) xx مالحظة: يمكن استخدام المعادلة التالية لحساب قيمة Cost of goods Sold Cost of Beginning Inventory 20,000 + Cost Of Purchase Purchase 30,000 - Purchase Returns 5,000 - Purchase Discount 1,000 = Net Purchase 24,000 + Fright In 1,000 25,000 = Cost of goods Available 45,000 - Cost of Ending Inventory 15,000 = Cost of goods Sold 30,000 Page 2 of 6 Ehab Abdou ( )

3 Actual Count Steps 1- Counting the physical quantities remains in inventory at end of period. 2- Determining the Ownership of Inventory. (By Adding or Deducting) Buyer (Receiver) Seller (Sender) a. Goods in transit. Included (F.O.B Shipping Point) Included (F.O.B Destination) b. Consignment goods. Excluded Included C. Goods with buy back agreements Excluded Included d. Goods with high rates of return Excluded (if returns is estimated) Included (if returns is estimated) e. Goods Sold on installment Excluded If Collectable is not estimated Included If Collectable is not estimated 3- Determining the cost of ending inventory The Cost flow Assumption Is used to determine The Value of Ending Inventory, both in perpetual or periodic inventory systems, these assumptions are:- a. First in First out [ FIFO] b. Average Cost (Moving Average) c. Specific Identification Exercise 1: Instructions Compute the following under each of cost flow assumptions (FIFO Average ) (a) Cost of ending inventory. (b) Cost of goods sold. (c) Gross profit. Page 3 of 6 Ehab Abdou ( )

4 Solution 1- Determining the goods available and the cost of goods available Units Unit Cost Total Costs 3/1 Beginning Inventory 100 $40 $4,000 3/3 Purchase ,000 3/10 Purchase ,000 3/30 Purchase ,400 Goods Available 400 Cost of Goods Available 20, Determining the quantity of ending inventory Quantity of ending inventory = Goods available Goods sold = 400 units 260 units = 140 units 3- Determining the Cost of ending inventory using the cost flow assumptions FIFO Average 40 $60 = $2,400 ( $20, ) 140 units 100 $55 = $5,500 $7,900 = $7, Determining the Cost of goods sold using the cost flow assumptions FIFO Average Cost of goods available $20,400 $20,400 (-) Cost of ending inventory 7,900 7,140 (=) Cost of Goods sold 12,500 13, Determining the Gross Profit using the cost flow assumptions FIFO Average Sales Revenue* $22,700 $22,700 (-) Cost of Goods Sold 12,500 13,260 (=) Gross Profit 10,200 9,440 * Sales revenue = (70*$80)+(80*$90)+(60*$90)+(50*$90) = $22,700 Page 4 of 6 Ehab Abdou ( )

5 Exercise 2: Call-Mart Inc. had the following transactions in its first month of operations. Instructions: Under Each of Cost flow methods compute the following assuming that Call-Mart Inc uses Perpetual inventory system: 1- Cost of Ending Inventory 2- Cost of Goods Sold FIFO Date Purchases Cost of goods sold Balance Q U.C T.C Q U.C T.C Q U.C T.C March $4.00 $8, $4.00 $8,000 March $4.40 $26, $4.00 $8, $4.40 $26,400 March $4.00 $8, $4.40 $8, $4.40 $17,600 March $4.75 $9, $4.40 $17, $4.75 $9,500 Cost of ending Cost of Goods Sold $16,800 Inventory $27,100 Aver Date Purchases Cost of goods sold Balance Q U.C T.C Q U.C T.C Q U.C T.C March $4.00 $8, $4.00 $8,000 March $4.40 $26, $4.30 $34,400 March $4.30 $17, $4.30 $17,200 March $4.75 $9, $4.45 $26,700 Cost of ending Cost of Goods Sold $17,200 Inventory $26,700 Page 5 of 6 Ehab Abdou ( )

6 Exercise 3: Call-Mart Inc. had the following transactions in its first month of operations. Assume that Call-Mart Inc. s 6,000 units of inventory consists of 1,000 units from the March 2 purchase, 3,000 from the March 15 purchase, and 2,000 from the March 30 purchase. Compute the amount of ending inventory and cost of goods sold using Specific Identification method. Comparing the results: FIFO Average Cost of ending Inventory Highest Lowest Cost of goods sold Lowest Highest Gross Profit Highest Lowest Net Income Highest Lowest Total assets (Current assets) Highest Lowest Shareholder s Equity Highest Lowest Liabilities No Effect No Effect Inventory Errors: Ending Income statement Balance sheet Inventory Current Year Next Year Assets Liabilities Equity Understated CGS (Over) CGS (Under) Under No Effect Under Overstated CGS (Under) CGS (Over) Over No Effect Over Page 6 of 6 Ehab Abdou ( )

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