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Chapter # 16 Inventory Valuation Principles of Accounting – B.Com Part – I Sameer Hussain www.a4accounting.weebly.com | www.facebook.com/a4accounting.net

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Page 1: Chapter # 16a4accounting.weebly.com/uploads/7/1/2/8/7128209/16-inventory...Date: Units purchased @ Rs.XX XX Units Rs.XXX Date: Units purchased @ Rs.XX XX Units Rs.XXX Total units

Chapter # 16 Inventory Valuation

Principles of Accounting – B.Com Part – I

Sameer Hussain

www.a4accounting.weebly.com | www.facebook.com/a4accounting.net

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Inventory Valuation

Chapter # 16

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Sameer Hussain

WHAT THE EXAMINER USUALLY ASK?

Perpetual Inventory System: o FIFO Method. o LIFO Method. o Moving Average Method.

Periodic Inventory System: o FIFO Method. o LIFO Method. o Weighted Average Method.

Gross Profit Method. Retail Price Method. Computation of cost of ending inventory. Computation of cost of goods sold. Computation of gross profit. Entries under Perpetual Inventory System and Periodic Inventory System. Comparative Income Statement. Effects of Inventory on Financial Statements.

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Inventory Valuation

Chapter # 16

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Chapter # 16

INVENTORY VALUATION Inventory valuation

The valuation on inventory at the end of particular period is called inventory valuation. An inventory count takes place to confirm that actual quantities support the figures given in the books of accounts. The differences between the inventories at the beginning and at the end of the period are used in calculation of cost of goods sold. There are two systems of inventory valuation:

a) Perpetual Inventory System. b) Periodic/physical Inventory System.

a) Perpetual inventory system

The process of keeping records in an inventory ledger or on a bin card in which the balance of the quantity in inventory is entered after each receipt or issue of stock. In some system the value of inventory balance is also entered after each transaction. There are three methods on inventory valuation under perpetual inventory system:

i. FIFO Method (First in First Out). ii. LIFO Method (last in First Out).

iii. Moving Average Method.

Fifo Method (first in first out)

A method of valuing units of merchandise issued from inventory based on using the earliest unit value for pricing the issues until all the stock received at that price has been used up. The next latest price is then used for pricing the issues, and so on.

Lifo Method (last in first out)

A method of valuing units of merchandise issued from the inventory by using the latest unit value for pricing the issues until all the quantity of inventory received at that price is used up. The next earliest price is then used for pricing the issues, and so on.

Moving average method

A method of valuing units of merchandise issued from inventory; it involves the recalculating the unit value to be used for pricing the issues after each new consignment has been added to the stock. The average is obtained by dividing the total stock value by the number of units in inventory.

Format of inventory card by perpetual system

Date Received/Purchase Sale/Issue Balance

Quantity Unit cost

Total cost

Quantity Unit cost

Total cost

Quantity Unit cost

Total cost

This column shows the This column shows the This column shows the Total purchases. Cost of goods sold. Cost of ending inventory.

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Entry to Record Purchase of Merchandise Under Perpetual Inventory System: Merchandise DR. (with the purchase amount) Accounts payable / Cash CR. (with the amount of inventory) (To record the purchase of merchandise) ----------------------------------------------------------------------------------------------------------------------

Adjusting Entry Under Perpetual Inventory System: Cost of goods sold DR. (with the amount of cost of goods sold) Merchandise inventory CR. (with amount of cost of goods sold) (To adjust the cost of goods sold) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 1: (Perpetual Inventory System – FIFO Method)

2004 Private – UOK The following data relate to the business of Arsalan Trading Company which uses perpetual inventory system and uses FIFO inventory valuation method. Units Unit Cost November 1 Inventory 50 Rs.50 November 4 Purchases 30 Rs.55 November 8 Sales 35 Rs.80 November 9 Purchases 40 Rs.60 November 20 Sales 60 Rs.85 November 25 Purchases 40 Rs.65 November 30 Sales 10 Rs.100 REQUIRED

(i) Compute the cost of ending inventory on November 30. (ii) Compute the gross profit on sales for the month of November.

SOLUTION # 1:

ARSALAN TRADING COMPANY INVENTORY VALUATION

PERPETUAL INVENTORY SYSTEM - FIFO METHOD FOR THE PERIOD NOVEMBER

Date Purchases/Received Sales/Issued Balance Units Unit

cost Total cost

Units Unit cost

Total cost

Units Unit cost

Total cost

1 Nov 50 50 2,500

4 Nov 30 55 1,650 50 50 2,500 30 55 1,650

8 Nov 35 50 1,750 15 50 750 30 55 1,650

9 Nov 40 60 2,400 15 50 750 30 55 1,650 40 60 2,400

20 Nov 15 50 750 25 60 1,500 30 55 1,650 15 60 900 25 Nov 40 65 2,600 25 60 1,500 40 65 2,600 30 Nov 10 60 600 15 60 900 40 65 2,600

110 6,650 105 5,650 55 3,500

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Computation of Cost of Ending Inventory: 15 Units @ Rs.60 each 900 40 Units @ Rs.65 each 2,600

55 units Cost of ending inventory 3,500

Computation of Cost of Goods Sold: Merchandise inventory (opening) 2,500 Add: Net purchases during the period 6,650 Merchandise available for sale 9,150 Less: Merchandise inventory (ending) (3,500) Cost of goods sold 5,650

Computation of Total Sales:

35 Units @ Rs.80 each 2,800 60 Units @ Rs.85 each 5,100 10 Units @ Rs.100 each 1,000

105 units Total sales 8,900

Computation of Gross Profit: Sales 8,900 Less: Cost of goods sold (5,650) Gross profit 3,250

ILLUSTRATION # 2: (Perpetual Inventory System – LIFO Method)

2004 Regular – UOK Vaqar & Co. uses Perpetual System and uses LIFO inventory valuation method. The records of the company show the following purchases and sales transactions for the month of September 2003: September 1 Inventory 5,000 units @ Rs.5 September 9 Purchase 2,500 units @ Rs.6 September 14 Sales 2,500 units @ Rs.12 September 19 Purchase 1,600 units @ Rs.7 September 21 Sales 2,200 units @ Rs.12 September 24 Purchase 3,000 units @ Rs.8 September 29 Sales 2,500 units @ Rs.12 REQUIRED Give entries in General Journal to record total purchases, total cost of goods sold and total sales on September 30. Assume that all transactions were on account.

SOLUTION # 2:

Computation of Total Sales: 2,500 Units @ Rs.12 each 30,000 2,200 Units @ Rs.12 each 26,400 2,500 Units @ Rs.12 each 30,000

7,200 units Total sales 86,400

Computation of Total Purchases:

2,500 Units @ Rs.6 each 15,000 1,600 Units @ Rs.7 each 11,200 3,000 Units @ Rs.8 each 24,000

7,100 units Total purchases 50,200

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VAQAR & CO. INVENTORY VALUATION

PERPETUAL INVENTORY SYSTEM LIFO METHOD

FOR THE PERIOD SEPTEMBER 2003

Date Purchases/Received Sales/Issued Balance Units Unit

cost Total cost

Units Unit cost

Total cost

Units Unit cost

Total cost

1 Sep 5,000 5 25,000

9 Sep 2,500 6 15,000 5,000 5 25,000 2,500 6 15,000

14 Sep 2,500 6 15,000 5,000 5 25,000

19 Sep 1,600 7 11,200 5,000 5 25,000 1,600 7 11,200

21 Sep 1,600 7 11,200 4,400 5 22,000 600 5 3,000 24 Sep 3,000 8 24,000 4,400 5 22,000 3,000 8 24,000 29 Sep 2,500 8 20,000 4,400 5 22,000 500 8 4,000

7,100 50,200 7,200 49,200 4,900 26,000

Computation of Cost of Ending Inventory:

4,400 Units @ Rs.5 each 22,000 500 Units @ Rs.8 each 4,000

4,900 units Cost of ending inventory 26,000

Computation of Cost of Goods Sold: Merchandise inventory (opening) 25,000 Add: Net purchases during the period 50,200 Merchandise available for sale 75,200 Less: Merchandise inventory (ending) (26,000) Cost of goods sold 49,200

VAQAR & CO.

GENERAL JOURNAL FOR THE MONTH OF SEPTEMBER 2003

Date Particulars P/R Debit Credit 1 Merchandise 50,200 Accounts payable 50,200 (To record the merchandise purchased on account) 2 Cost of goods sold 49,200 Merchandise 49,200 (To record the cost of goods sold) 3 Accounts receivable 86,400 Sales 86,400 (To record the merchandise sold on account)

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ILLUSTRATION # 3: (Perpetual Inventory System – Moving Average Method)

Zafar Enterprises deal in only one product. Opening stock on October 1st 2002 comprised of 20 units at a total cost of Rs.20,000. Purchase and Sales during October 2002 are as follows:

Purchases Sales Date Units Unit Cost Date Units Unit Cost

October 3 140 Rs.700 October 6 90 Rs.1,500 October 7 60 Rs.500 October 10 50 Rs.1,300 October 14 150 Rs.800 October 19 170 Rs.1,400 October 20 120 Rs.1,000 October 23 30 Rs.1,500 October 25 30 Rs.1,100 October 31 100 Rs.1,700 REQUIRED Calculate the cost of goods sold, gross profit, and value of stock as on October 31st using Moving Average Method assuming the company uses perpetual Inventory system.

SOLUTION # 3:

ZAFAR ENTERPRISES INVENTORY VALUATION

PERPETUAL INVENTORY SYSTEM MOVING AVERAGE METHOD

FOR THE PERIOD OCTOBER 2002

Date Received Issues Balance

Qty. of

units

Unit Cost

Total Cost

Qty. of

units

Unit Cost

Total Cost

Qty. of

units

Unit Cost

Total Cost

Oct 1 20 1,000 20,000 3 140 700 98,000 160 737.5 118,000 6 90 737.5 66,375 70 737.5 51,625 7 60 500 30,000 130 627.88 81,625

10 50 627.88 31,394 80 627.88 50,231 14 150 800 120,000 230 740.13 170,231 19 170 740.13 125,822 60 740.13 44,409 20 120 1,000 120,000 180 913.38 164,409 23 30 913.38 27,401 150 913.38 137,008 25 30 1,100 33,000 180 944.49 170,008

100 944.49 94,449 80 944.49 75,559 500 401,000 440 345,441 80 75,559

Computation of Cost of Ending Inventory:

80 Units @ Rs.944.49 each 75,559 80 units Cost of ending inventory 75,559

Computation of Cost of Goods Sold: Merchandise inventory (opening) 20,000 Add: Net purchases during the period 401,000 Merchandise available for sale 421,000 Less: Merchandise inventory (ending) (75,559) Cost of goods sold 345,441

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Computation of Total Sales: 90 Units @ Rs.1,500 each 135,000 50 Units @ Rs.1,300 each 65,000

170 Units @ Rs.1,400 each 238,000 30 Units @ Rs.1,500 each 45,000

100 Units @ Rs.1,700 each 170,000 440 units Total sales 653,000

Computation of Gross Profit: Sales 653,000 Less: Cost of goods sold (345,441) Gross profit 307,559

B) periodic inventory system

The counting or evaluating of the inventory held by an organization at the end of particular period is called periodic inventory system. Same as perpetual inventory system, there are three methods of inventory valuation under periodic inventory system:

i. FIFO Method (First in First Out). ii. LIFO Method (Last in First Out). iii. Weighted Average Method.

Format of units purchased, units sold & units at end

Date: Inventory (Beg) @ Rs.XX XX Units Rs.XXX Add: Units Purchased During the Period: Date: Units purchased @ Rs.XX XX Units Rs.XXX Date: Units purchased @ Rs.XX XX Units Rs.XXX Total units purchased during the period XX Units Rs.XXX Total units available for sale XX Units Rs.XXX Less: Units sold during the period (XX) Units Inventory (end) in units XX Units

After making this schedule, the computation of cost of goods sold or cost of ending inventory takes place.

Entry to Record Purchase of Merchandise Under Periodic Inventory System: Purchases DR. (with the purchase amount) Accounts payable / Cash CR. (with the amount of inventory) (To record the merchandise purchased) ----------------------------------------------------------------------------------------------------------------------

Adjusting Entry Under Periodic Inventory System: Merchandise inventory DR. (with ending inventory amount) Expense and revenue summary CR. (with ending inventory amount) (To close the ending inventory) ----------------------------------------------------------------------------------------------------------------------

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ILLUSTRATION # 4: (Periodic Inventory System – FIFO, LIFO & Weighted Average

Method, Comparative Income Statement) 2002 Regular & Private – UOK

The following data relate to Riaz & Co. which uses the Periodic Inventory System: Jan. 1 Inventory 8,000 units @ Rs.4.00 per unit. Jan. 10 Purchases 20,000 units @ Rs.4.20 per unit. Jan. 20 Purchases 30,000 units @ Rs.4.30 per unit. Jan. 30 Purchases 10,000 units @ Rs.4.50 per unit. Jan. 31 Sold 56,000 units at a uniform selling price of Rs.8.0 per unit. REQUIRED

(1) Determine the cost of ending inventory by the following methods: (a) FIFO. (b) LIFO. (c) Weighted Average.

(2) Prepare a comparative income statement showing the gross profit under each of the above methods separately.

SOLUTION # 4:

RIAZ & CO. SCHEDULE OF UNITS PURCHASED, UNITS SOLD AND UNITS AT END

FOR THE PERIOD JANUARY Date Description Units Cost (Rs.)

1 January Inventory (opening) @ Rs.4.00 each 8,000 32,000 Add: Units Purchased During the Period: 10 January Purchased @ Rs.4.20 each 20,000 84,000 20 January Purchased @ Rs.4.30 each 30,000 129,000 30 January Purchased @ Rs.4.50 each 10,000 45,000 Total units purchased during the period 60,000 258,000 Total units available for sale 68,000 290,000 Less: Units Sold During the Period: 31 January Total units sold during the period (56,000) Unsold units at end 12,000 Computation of Cost of Ending Inventory by FIFO Method (Periodic System): Date Particulars Units Unit Cost Total Cost January 20 Purchases 2,000 units @ Rs.4.30 each 8,600 January 30 Purchases 10,000 units @ Rs.4.50 each 45,000

12,000 units Cost of ending inventory Rs.53,600

Computation of Cost of Ending Inventory by LIFO Method (Periodic System): Date Particulars Units Unit Cost Total Cost January 1 Inventory 8,000 units @ Rs.4.00 each 32,000 January 10 Purchases 4,000 units @ Rs.4.20 each 16,800

12,000 units Cost of ending inventory Rs.48,800

Computation of Cost of Ending Inventory by Weighted Average Method (Periodic System): Average per unit cost = Total cost of merchandise available for sale Total units available for sale Average per unit cost = 290,000 68,000 Average per unit cost = Rs.4.2647 Cost of ending inventory = Unsold units at end x Average per unit cost Cost of ending inventory = 12,000 x 4.2647 Cost of ending inventory = 51,176

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RIAZ & CO. COMPARATIVE INCOME STATEMENT FOR THE PERIOD ENDED 31 JANUARY

FIFO LIFO Weighted Average Sales (56,000 x 8.00) 448,000 448,000 448,000 Less: Cost of Goods Sold: Inventory (beginning) 32,000 32,000 32,000 Add: Total purchases 258,000 258,000 258,000 Merchandise available for sale 290,000 290,000 290,000 Less: Inventory (ending) (53,600) (48,800) (51,176) Cost of goods sold (236,400) (241,200) (238,824) Gross profit 211,600 206,800 209,176

ILLUSTRATION # 5: (Entries under Perpetual & Periodic Inventory System)

1997 Private – UOK Give the necessary journal entries under both Perpetual and Periodic systems from the following:-

(i) Purchased merchandise on account Rs.120,000 and cash Rs.30,000. (ii) Returned merchandise worth Rs.3,000 cash. (iii) Paid freight on purchases Rs.800. (iv) Paid to the merchandise creditor’s subject to credit term 2/10, n/30. (v) Sold merchandise costing Rs.55,000 for cash Rs.10,000 and on account Rs.50,000.

SOLUTION # 5:

M/S. ___________ GENERAL JOURNAL (PERIODIC SYSTEM)

Date Particulars P/R Debit Credit 1 Purchases 150,000 Accounts payable 120,000 Cash 30,000 (To record the goods purchased on account & for

cash)

2 Cash 3,000 Purchase returns and allowance 3,000 (To record the merchandise returned to supplier) 3 Freight charges 800 Cash 800 (To record the freight paid on purchase of

merchandise)

4 Accounts payable 120,000 Purchase discount 2,400 Cash 117,600 (To record the cash paid to supplier) 5 Accounts receivable 50,000 Cash 10,000 Sales 60,000 (To record the goods sold for cash and on account)

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M/S. ___________ GENERAL JOURNAL

(PERPETUAL SYSTEM) Date Particulars P/R Debit Credit 1 Merchandise 150,000 Accounts payable 120,000 Cash 30,000 (To record the goods purchased on account & for cash) 2 Cash 3,000 Merchandise returned 3,000 (To record the merchandise returned to supplier) 3 Freight charges 800 Cash 800 (To record the freight paid on purchase of merchandise) 4 Accounts payable 120,000 Purchase discount 2,400 Cash 117,600 (To record the cash paid to supplier) 5 Accounts receivable 50,000 Cash 10,000 Sales 60,000 (To record the goods sold for cash and on account) 6 Cost of goods sold 55,000 Merchandise 55,000 (To record the cost of goods sold)

Gross profit method

It is a method of estimating inventory that can be used for interim accounting periods or when records are destroyed. It is not acceptable for the annual report. The method is based on the concept that if you know the percentage of the selling price that is the profit, then you can calculate the amount that is the cost of goods (sales minus the gross-margin percentage time’s sales). Starting with beginning inventory, add the purchases during the period then deduct the calculated cost of goods sold. What remains is an estimate of ending inventory. The estimate is only as good as the data used to calculate the gross-margin percentage.

Merchandise inventory (beginning) XXX Add: Net Purchases: Purchases XXX Add: Transportation-in XXX Delivered purchases XXX Less: Purchase return and allowance (XXX) Less: Purchase discount (XXX) Net purchases XXX Merchandise available for sale XXX Less: Cost of Goods Sold: Sales XXX Less: Sales return (XXX) Less: Sales discount (XXX) Net sales XXX Less: Gross profit (net sales x gross profit rate) (XXX) Cost of goods sold (XXX) Cost of ending inventory XXX

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ILLUSTRATION # 6: (Cost of Ending Inventory by Gross Profit Method)

Allied Co. have Inventory on January 1st 2009 Rs.225,000. From January 1st 2009 to June 30th 2009: Sales Rs.830,000 Sales Return & Allowance 18,000 Sales Discount 12,000 Purchases 650,00 Purchase Return & Allowance 25,000 Transportation-in 10,000 REQUIRED

Compute the value of inventory at the end of 1st half of 2009 through Gross Profit Method. The estimated Gross Profit of the company is 20% on sales.

SOLUTION # 6:

ALLIED CO. COST OF ENDING INVENTORY by GROSS PROFIT METHOD

Merchandise inventory (beginning) 225,000 Add: Net Purchases: Purchases 650,000 Add: Transportation-in 10,000 Delivered purchases 660,000 Less: Purchase return and allowance (25,000) Net purchases 635,000 Merchandise available for sale 860,000 Less: Cost of Goods Sold: Sales 830,000 Less: Sales return & allowance (18,000) Less: Sales discount (12,000) Net sales 800,000 Less: Gross profit (800,000 x 20%) (160,000) Cost of goods sold (640,000) Cost of ending inventory 220,000

Retail price method

It is a method of determining inventory in retail operations, without a detailed physical count of the inventory items. The method is based on the relationship between the total cost of goods available for sale at wholesale (or the purchase price) and at retail (or selling price). Start with cost of goods available for sale at the retail value and deduct sales for the period. The result is the retail value of ending inventory. Then, calculate the percentage of sales price that is cost, by dividing the total cost of goods available for sale at the purchase price by the total cost of goods available for sale at retail. Multiply the retail value of ending inventory by that percentage to get an estimate of ending inventory at cost. Businesses can use the retail method for year-end reporting. The physical count of inventory goes faster at the retail price, which is on the item, than at cost, which would require the counter to look up the cost for each item.

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COST PRICE RETAIL PRICE Beginning inventory XXX XXX Add: Net Purchases: Purchases XXX Add: Transportation-in XXX Delivered purchases XXX Less: Purchase return and allowance (XXX) Less: Purchase discount (XXX) Net purchases XXX XXX Merchandise available for sale XXX XXX Less: Net Sales: Sales XXX Less: Sales return and allowances (XXX) Less: Sales discount (XXX) Net sales (XXX) Ending inventory based on retail price XXX

Cost percentage (%) = Merchandise available for sale at cost price

x 100 Merchandise available for sale at retail price

Cost of ending inventory = Ending inventory at retail price x Percentage of cost

ILLUSTRATION # 7: (Cost of Ending Inventory by Retail Price Method)

From the following data calculate the cost of ending inventory: At Cost At Retail Beginning Inventory Rs.55,000 Rs.60,000 Purchases 310,000 440,000 Net Sales 420,000

SOLUTION # 7:

COST OF ENDING INVENTORY RETAIL PRICE METHOD

Cost Price Retail Price Beginning inventory 55,000 60,000 Add: Purchases during the period 310,000 440,000 Merchandise available for sale 365,000 500,000 Less: Sales (420,000) Ending inventory based on retail price 80,000 Percentage of Cost = Merchandise available for sale at cost price x 100% Merchandise available for sale at retail price Percentage of cost = 365,000 x 100 500,000 Percentage of cost = 73% Cost of ending inventory = Ending inventory at retail price x Percentage of cost Cost of ending inventory = 80,000 x 73% Cost of ending inventory = 58,400

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ity

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ILLUSTRATION # 8: (Effects of Inventory)

2010 Regular – UOK

State the effects of understatement of ending inventory on: (i) Cost of goods sold (ii) Net income (iii) Current assets (iv) Total assets (v) Owner’s equity

SOLUTION # 8:

Effects of Understatement of Ending Inventory: (i) Cost of goods sold Increase (ii) Net income Decrease (iii) Current assets Decrease (iv) Total assets Decrease (v) Owner’s equity Decrease

Comparative income statement

PARTICULARS FIFO LIFO WEIGHTED AVERAGE

Sales XXX XXX XXX Less: Cost of Goods Sold: Opening inventory XXX XXX XXX Add: Net purchases XXX XXX XXX Merchandise available for sale XXX XXX XXX Less: Ending inventory (XXX) (XXX) (XXX) Cost of goods sold (XXX) (XXX) (XXX) Gross profit XXX XXX XXX

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Practice questions

Question # 1: 1993 Private – UOK Karim Company uses a “Perpetual Inventory System”. The records of the Company show the following purchases and sale transactions for the month of January 1993: January 01, Beginning Inventory 80 Units at Rs.15 per unit. January 03, Purchased 300 Units at Rs.16 per unit. January 05, Sold 200 Units at Rs.25 per unit. January 10, Purchased 400 Units at Rs.18 per unit. January 16, Sold 500 Units at Rs.25 per unit. January 27, Sold 50 Units at Rs.25 per unit. January 31, Purchased 100 Units at Rs.20 per unit. REQUIRED Determine the cost of ending inventory. The cost of goods sold and the gross profit Perpetual System, “FIFO METHOD”. Question # 2: 1989 Regular & Private – UOK Salam Company uses a perpetual inventory system. The records of the Company show the following purchase and sale, transaction for the month of April 1989. April 01, Inventory 100 Units @ Rs.60. April 05, Purchases 40 Units @ Rs.65. April 08, Sales 50 Units @ Rs.100. April 09, Purchases 80 Units @ Rs.60. April 21, Sales 120 Units @ Rs.100. April 25, Purchases 80 Units @ Rs.70. April 30, Sales 10 Units @ Rs.110. REQUIRED

(1) Find out the value of ending inventory using FIFO method of Inventory Valuation. (2) Assume that all sales were made on Credit compute the total sales and total Cost of

Goods Sold for April 1989. Prepare an entry in general journal form to record these sales on a second entry to record the cost of goods sold for April, 1989.

(3) Compute the gross profit on sales for the month of April 1989. Question # 3: 1992 Regular – UOK The following data relate to the business of Waqar & Co. which uses Perpetual Inventory System, FIFO Method.

UNITS UNIT COST August 01 Beginning Inventory 600 Rs.10 August 03 Purchased 300 Rs.11 August 18 Sold 400 August 27 Purchased 700 Rs. 12 August 13 Sold 600 REQUIRED

(i) Determine Ending Inventory on August 31. (ii) Compute the cost of Goods Sold during August.

Question # 4: 1993 Regular – UOK Karim Trading Company uses perpetual system and uses F.I.F.O. Inventory valuation method. The records of the Inventory purchases and Sales during the month of January are as follows. January 01, Inventory 1,000 Units @ Rs.10. January 10, Purchase on account 5,000 Units @ Rs.11. January 15, Sales on Account 4,000 Units @ Rs.22. January 18, Purchase on Cash 3,000 Units @ Rs.12. January 20, Sales on Account 4,000 Units @ Rs.22.

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January 25, Purchase on Cash 6,000 Units @ Rs.13. January 30, Sales on Cash 5,000 Units @ Rs 22. REQUIRED Give dated entries in the General Journal for purchases, cost of goods sold and sales price of the merchandise showing computations. Question # 5: 1995 Regular – UOK Ahsan Company presents the following data for the month of August 1995: August 1 Balance 100 units @ Rs.25 per unit August 4 Purchases 200 units @ Rs.26 per unit August 6 Sales 160 units @ Rs.35 per unit August 7 Sales 80 units @ Rs.38 per unit August 10 Purchases 240 units @ Rs.24 per unit August 13 Sales 100 units @ Rs.33 per unit August 15 Sales 110 units @ Rs.30 per unit August 20 Purchases 220 units @ Rs.26 per unit August 27 Sales 130 units @ Rs.33 per unit August 30 Sales 40 units @ Rs.35 per unit REQUIRED Determine the cost of ending inventory, the cost of goods sales and the gross profit under perpetual system by FIFO method. Question # 6: 1998 Regular – UOK Friends Store uses the perpetual inventory system and FIFO method of inventory valuation, following are the data concerning purchases and sales of merchandise during the month of January 1998:- Quantity Rate per unit January 1, 98 Merchandise inventory 1,000 Rs.12/per unit January 5 Purchases 1,200 Rs.13/per unit January 8 Sales 1,500 Rs.18/per unit January 15 Purchases 2,000 Rs.14/per unit January 18 Sales 1,800 Rs.20/per unit January 25 Purchases 3,000 Rs.15/per unit January 26 Sales 1,200 Rs.21/per unit January 30 Purchases 2,500 Rs.15/per unit January 31 Sales 2,100 Rs.22/per unit REQUIRED

(i) Cost of inventory at January 31st. (ii) Set up T account for merchandise inventory and make all the posting and balance the

accounts. Question # 7: 2005 Private – UOK The inventory record of Adam Company for the month of December 2005 is as under: Units Unit Cost December 1 Inventory 800 Rs.6 December 6 Purchases 500 Rs.7 December 16 Sales @ Rs.13 400 --- December 26 Sales @ Rs.14 700 --- December 30 Purchases 900 Rs.8 REQUIRED Compute the ending inventory and gross profit on sales using the FIFO method and the perpetual system.

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Question # 8: 2009 Private – UOK The following data related to the business of Ashraf Company, which uses the Perpetual System and FIFO Method. Nov. 1 Merchandise inventory 500 units @ Rs.50 each.

Purchases Sales Nov. 4 300 units @ Rs.55 Nov. 8 350 units @ Rs.70 Nov. 9 400 units @ Rs.60 Nov. 20 600 units @ Rs.80 Nov. 25 400 units @ Rs.65 Nov. 30 100 units @ Rs.90 REQUIRED

(i) Prepare an inventory card, indicating each day’s inventory. (ii) Give the cost of goods available for sale and the cost of goods sold at Nov. 30. (iii) Compute gross profit.

Question # 9: 2011 Regular – UOK Saad Co. sells merchandise. At Dec. 31, 2010 the Co.’s inventory amounted to Rs.50,000. During the 1st week of Jan. 2011 the Co. made only one purchase and one sale. These transactions were as follows: Jan. 3: Sold merchandise for Rs.20,000 cash. The total cost of merchandise amounted to

Rs.11,200. Jan. 7: Purchased merchandise amounted to Rs.10,000; term 2/10, n/30. REQUIRED Prepare journal entries to record the above transactions under Perpetual inventory System. Question # 10: 1999 Regular & Private – UOK On the books of Pak Enterprises, on July 1, 1998, the merchandise inventory account had a balance of Rs.62,300. During July 1998, the following transactions took place: July 10: Purchased merchandise on credit for Rs.11,950. July 25: Sold merchandise on account for Rs.18,400 costing Rs.13,600. REQUIRED Using the Perpetual System:

(1) Give the necessary dated journal entries in proper form of the above transactions. (2) Give the necessary adjusting & closing journal entries in proper form as on July 31,

1998. (3) Prepare partial income statement for the month ended July 31, 1998.

Question # 11: 1988 Regular & Private – UOK Sharif Trading Company uses perpetual inventory system and uses LIFO Inventory valuation Method. The records of the Inventory purchases and sales during the month of January are as follows: January 01, Inventory 100 Units @ Rs.10 January 15, Purchase on Account 700 Units @ Rs.12 January 18, Sales on Account 650 Units @ Rs.20 January 20, Purchase for Cash 500 Units @ Rs.13 January 30, Sales for Cash 520 Units @ Rs.20 REQUIRED

(1) Give dated entries in the General Journal for purchases, cost of goods sold and sales price of the merchandise showing your computations.

(2) Post the entries to the relevant accounts.

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Question # 12: 2006 Private – UOK Inventory data for a merchandise item stocked by Philips Electronics are as follows: 2006 Units Unit Cost March 1 Beginning inventory 150 2,000 March 4 Purchased 75 1,500 March 15 Sold 100 3,000 March 25 Purchased 175 2,500 March 30 Sold 200 2,500 REQUIRED

(i) Compute (i) the cost of goods sold during March 2006, (ii) the ending inventory and (iii) the gross profit on March 30, 2006 using the Perpetual Inventory System and LIFO Method.

(ii) Prepare dated necessary journal entries for the above transactions, assuming all transactions were on credit.

Question # 13: 2011 Private – UOK Following transactions relate to the business of Babar Traders: November 1: Balance in merchandise inventory 7,000 units @ Rs.7.00 2: Purchased merchandise for cash Rs.21,000 at a unit price of Rs.4.00 5: Purchased merchandise on account Rs.2,500 at a unit price of Rs.5.00 7: Sold 4,100 units on account at Rs.10.00 per unit 10: Purchased 5,000 units at Rs.5.00 per unit 12: Sold 10,100 units at Rs.10.00 per unit 15: Purchased 4,500 units at Rs.8.00 per unit 20: Sold 5,000 units at Rs.10.00 per unit 25: paid carriage outwards on sales Rs.2,500 REQUIRED

(a) Prepare dated journal entries, assuming that company uses FIFO method under Perpetual Inventory System.

(b) Show necessary computations for cost of ending inventory, cost of goods sold, and sales of the merchandise.

(c) Compute the amount of gross profit under FIFO method. Question # 14: 2012 Private – UOK Following transactions relate to the business of Husnain Traders: November 1: Balance in merchandise inventory 6,000 units @ Rs.7.00. November 2: Purchased merchandise for cash Rs.42,000 at a unit price of Rs.4.00. November 5: Purchased merchandise on account 5,000 units at a unit price of Rs.5.00. November 7: Sold 8,200 units on account at Rs.10.00 per unit. November 10: Purchased 7,000 units at Rs.5.00 per unit. November 12: Sold 12,100 units at Rs.10.00 per unit. November 15: Purchased 9,000 units at Rs.8.00 per unit. November 20: Sold 12,100 units at Rs.10.00 per unit. November 25: Paid carriage out on sales Rs.3,500. REQUIRED

(i) Prepare dated journal entries (Assume that company uses LIFO method under perpetual inventory system).

(ii) Compute amount of Gross Profit under LIFO.

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Question # 15: 2009 Regular – UOK On February 1, 2008, Abid Company had inventory of a commodity 150 units @ Rs.15. during February his transactions were as follows: Feb. 6 Purchased 150 units @ Rs.16. Feb. 10 Sold 180 units @ Rs.20. Feb. 21 Purchased 150 units @ Rs.17. Feb. 23 Sold 160 units @ Rs.22. Feb. 25 A customer returned 10 units from Feb. 10 sale. The company uses perpetual system of inventory applying Moving Average Method. REQUIRED Prepare inventory card and find out the value of ending inventory. Question # 16: 2001 Regular & Private – UOK On January 1, 2001 Zia Trading Company had 8,000 units in inventory costing Rs.120,000. During the period ended June 30, purchases were made as follows: February 4 1,500 units @ Rs.16 April 2 2,500 units @ Rs.18 May 31 6,000 units @ Rs.19 Sales made during the period ended June 30, are as under:- January 10 Sold 4,000 units at Rs.20 per unit. February 6 Sold 1,000 units at Rs.21 per unit. April 15 Sold 2,000 units at Rs.22 per unit. June 16 Sold 4,000 units at Rs.23 per unit. REQUIRED Determine the cost of ending inventory and cost of goods sold at June 30, assuming that the business uses the perpetual inventory system and Moving Average Method for inventory valuation. Question # 17: 1996 Regular – UOK During the year 1995 Shamim Company sold 12,000 units of X commodity for Rs.240,000. The company had on hand 1,500 units each Rs.13/= on January 1, 1995. Purchases during 1995 were as follows:

Month Date Quantity in Units Unit Cost Total Cost January 20 2,000 Rs.12.00 Rs. 24,000 March 30 1,000 Rs.13.00 Rs. 13,000 May 24 3,000 Rs.13.00 Rs. 39,000 July 12 4,000 Rs.15.00 Rs. 60,000 September 15 1,000 Rs.16.00 Rs. 16,000 November 20 1,000 Rs.17.00 Rs. 17,000 December 8 600 Rs.18.00 Rs. 10,800

Total 12,600 Rs. 179,800 REQUIRED On December 31, 1995, compute the gross profit/loss on sales, assuming the use of the following cost of closing inventory of each method:

(a) FIFO (b) LIFO (c) Weighted Average

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Question # 18: 1997 Private – UOK The record of Pioneer Sales Co. shows the following data for its sales and purchases:- Nov. 1, 1996 Beginning inventory 300 units at Rs.55 Purchases Sold Nov. 4 375 units at Rs.55 Nov. 12 400 units at Rs.56 Nov. 24 200 units at Rs.57 250 units at Rs.60 300 units at Rs.64 100 units at Rs.65 REQUIRED Compute the ending inventory and the gross profit at the end of November, 1996 under FIFO and LIFO using Periodic Inventory System. Question # 19: 1997 Regular – UOK Below given data entries to Umer Nadeem & Bros. for the month of May, 1997. The firm uses Periodic Inventory System:- May – 1 Inventory of 150 units costing Rs.25,500. May – 10 Bought 100 units at Rs.173/= each. May – 18 Bought 125 units at Rs.178/= each. May – 24 Bought 75 units at Rs.180/= each. May – 28 Bought 200 units at Rs.176/= each. During the month 450 units were sold for Rs.85,500. REQUIRED

(i) Determine the cost of goods sold under LIFO and FIFO method. (ii) Quantity and value of ending inventory under Weighted Average Method. (iii) Compute gross profit under each of the above method.

Question # 20: 2007 Regular – UOK Zulfiqar Trading Company uses Periodic Inventory System. The beginning inventory balance of item “Z” on June 1 and purchases of this item during June were as follows: June 1 Inventory 10,000 units @ Rs.10.00 June 8 Purchases 15,000 units @ Rs.14.00 June 14 Purchases 18,000 units @ Rs.16.00 June 22 Purchases 12,000 units @ Rs.18.00 June 27 Purchases 5,000 units @ Rs.20.00 During the month of June, net sales are Rs.875,000 @ Rs.25 per unit. REQUIRED

(1) Determine the cost of ending inventory under each of the following methods: (a) FIFO Method (b) LIFO Method (c) Weighted Average Method

(2) Prepare Comparative Income Statement for the period ended on June 30, 2007 to determine gross profit.

Question # 21: 1990 Regular & Private – UOK The following data relate to the business or Marghoob Co. which uses a Periodic Inventory System.

Quantity in Units Unit Cost January 1989 Inventory 40,000 Rs.4.00 February 1989 Purchases 100,000 Rs.4.20 May 1989 Purchases 1,50,000 Rs.4.10 July 1989 Purchases 50,000 Rs.4.30 November 1989 Purchases 10,000 Rs.4.40 On December 31, 1989 the units on hand were 70,000.

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REQUIRED (a) Determine the cost of Ending Inventory of 70,000 Units under:

(i) FIFO (ii) LIFO (iii) Weighted Average Method

(b) Prepare Adjusting Journal Entries as on December 31, 1989 under each method separately.

Question # 22: 1995 Private – UOK The beginning inventory and the purchases of a product are as follows: October 1: Inventory 400 units @ Rs.6.25 October 8: Purchases 300 units @ Rs.6.50 October 19: Purchases 200 units @ Rs.6.75 October 23: Purchases 500 units @ Rs.6.80 October 29: Purchases 600 units @ Rs.7.00 On October 31, 500 units remain in inventory. Periodic inventory system is used. REQUIRED Determine the cost of ending inventory and the cost of goods sold, using the following methods:

(a) Average cost. (b) First – in First – out. (c) Last – in First – out.

Question # 23: 2008 Regular – UOK Rahat Equipment Co. provides you with the following inventory data:

Date: 2008 Units Cost Per Unit January 1 Beginning 40 1,250 February 28 Purchases 100 1,220 June 25 Purchases 85 1,200 November 11 Purchases 110 1,800 The inventory on Dec. 31, 2008, of 50 units. REQUIRED Determine cost of:

(i) Cost of goods available for sale and (ii) Required to cost of ending inventory, using FIFO Method, Periodic System.

Question # 24: 1998 Private – UOK Records of Rashid Bros. Ltd. show the following data relative to commodity: Jan. 1, 1998 Opening inventory 1,000 units Rs.6.00 per unit Feb. 5, 1998 Purchases 2,500 units Rs.5.50 per unit Mar. 12, 1998 Purchases 3,500 units Rs.5.60 per unit Mar. 15, 1998 Sales 4,000 units Rs.9.00 per unit Apr. 10, 1998 Purchases 4,500 units Rs.6.00 per unit May 14, 1998 Purchases 1,500 units Rs.8.00 per unit June 30, 1998 Sales 4,000 units Rs.10.00 per unit REQUIRED

(i) Compute the cost of ending inventory under the period system on June 30, 1998 using the following methods:

a) FIFO b) LIFO c) Average Method (ii) Give the adjusting entries under each method.

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Question # 25: 2006 Regular – UOK Salman & Company uses a Periodic Inventory System. The records of the company show the following purchases and sales transactions for the month of November 2006. Nov. 1 Inventory 1,000 units @ Rs.50 each. Nov. 10 Purchases for cash 1,600 units @ Rs.60 each. Nov. 15 Sale for cash 1,500 units @ Rs.100 each. Nov. 20 Purchases on account 2,000 units @ Rs.80 each. Nov. 26 Sales on account 900 units @ Rs.120 each. REQUIRED

(a) Give dated entries in the General Journal for purchases and sales of merchandise. (b) Determine the cost of ending inventory and cost of goods sold separately by:

(i) First in First out method, and (ii) Last in First out method.

Question # 26: 2008 Private – UOK The records of Maria Traders show the following data relating to commodity A:

2008 Units Per Unit Jan. 1 Opening inventory 100 50 Feb. 5 Purchases 200 55 Mar. 12 Purchases 300 54 Mar. 14 Sales 350 100 Apr. 12 Purchases 500 60 May. 14 Purchases 100 70 Jun. 30 Sales 400 110 REQUIRED

(i) Compute the cost of ending inventory on June 30, 2008 by each of the following methods:

(a) First-in-first-out (FIFO) (b) Last-in-first-out (LIFO)

Assume that company uses Periodic System of inventory valuation. (ii) Prepare comparative income statement showing effect of two alternative valuation

methods on gross profit. Question # 27: 2012 Regular – UOK The Gap uses a Periodic Inventory System. During the first year of operations, the company made four purchases of a particular product. Each purchase was for 300 units and the prices paid were Rs.7 per unit in the first purchase, Rs.8 per unit in the second purchase, Rs.10 per unit in the third purchase, and Rs.11 per unit in the fourth purchase. At year-end, 350 of these units remain unsold. REQUIRED Compute the cost of goods sold under the FIFO method and LIFO method, separately. Question # 28: 1996 Private – UOK The inventory record of Imam Company showed the following transactions for the month ended September 30, 1995: Units Unit Cost September 1 Inventory 700 Rs. 6.20 September 5 Purchases 400 6.40 September 18 Sales @ Rs.12 300 --- September 25 Sales @ Rs.12.5 600 --- September 28 Purchases 600 6.70

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REQUIRED Compute the ending inventory under:

(i) LIFO – Perpetual System (ii) LIFO – Periodic System Explain the causes of difference in the final inventory valuations under the above two systems. Question # 29: 2005 Regular – UOK The inventory records of Essa Company showed the following transactions for the month ended December 31, 2004: Units Cost December 1 Inventory 700 6.20 December 6 Purchases 400 6.40 December 15 Sales @ Rs.14 300 --- December 22 Sales @ Rs.15 600 --- December 28 Purchases 600 6.70 REQUIRED Compute ending inventory under:

(i) LIFO – Perpetual, and (ii) LIFO – Periodic.

Question # 30: 2011 Regular – UOK The following data relate to the business of Aamir & Co. Date Units Unit Cost / Price Nov. 1 Beginning inventory 6,000 Rs.100 Nov. 5 Purchased 3,000 Rs.150 Nov. 15 Sold 4,000 Rs.250 Nov. 25 Purchased 7,000 Rs.180 Nov. 30 Sold 6,000 Rs.300 REQUIRED

(i) Prepare inventory card under FIFO Method. (ii) Assume that Co. uses Periodic Inventory System. Compute cost of goods sold and

merchandise inventory (ending) under LIFO Method & calculate gross profit. Question # 31: 2010 Regular – UOK The following are selected transactions performed by Zenat Trading Company:

(i) Purchased merchandise on account Rs.27,000. (ii) Received allowance on supply of defective goods Rs.2,000. (iii) Sold merchandise costing Rs.16,000 on account for Rs.20,000. (iv) Accepted the return of defective merchandise from customer (cost Rs.4,000 sales price

Rs.5,000). REQUIRED Prepare general journal entries under:

(i) Periodic System (ii) Perpetual System Question # 32: 2000 Regular & Private – UOK Following data are obtained from the records of Karim & Sons. Units Sold Units Purchased Cost per Unit December 1 Inventory - 9 Rs.50 December 12 Credit purchase - 10 Rs.55 December 17 Sales 8 - -- December 21 Cash purchase - 10 Rs.60 December 28 Sales 9 - --

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REQUIRED (i) Calculate the cost of inventory at December 31, and cost of goods sold under the

periodic system and LIFO method. (ii) Calculate the cost of inventory at December 31, and cost of goods sold under the

perpetual system and FIFO method. (iii) Give the necessary adjusting journal entries under both the system separately.

Question # 33: 2003 Regular & Private – UOK The following data are taken from Mirza Trading Co. at Dec. 31, 2002: Jan. 1 Balance 9 units @ Rs.500 each Apr. 12 Purchased 10 units @ Rs.550 each Aug. 17 Sold 8 units Oct. 21 Purchased 10 units @ Rs.600 each Dec. 28 Sold 9 units REQUIRED

(a) Using FIFO Periodic: (i) Compute the cost of ending inventory at Dec. 31, 2002. (ii) Compute the cost of goods sold for the year ended Dec. 31, 2002. (iii) Prepare journal entries to record purchases and the year-end adjusting entry

using cost of goods sold. (b) Using FIFO Perpetual:

(i) Prepare the inventory card in good form. (ii) Give an entry to adjust inventory at Dec. 31, 2002.

Question # 34: 2009 Regular – UOK The following year’s data is available for a single product of a company: 2007 2008 Units Rate Units Rate Purchases 900 Rs.35 1,100 Rs.43 Purchases 1,000 37 750 46 Purchases 650 40 800 48 Sales 1,000 2,300 The company uses FIFO method. REQUIRED

(i) Compute the inventory at the end of the each year. (ii) What is the amount of beginning inventory of 2008?

Question # 35: 1992 Private – UOK Zenith Traders deal in a specialized type of value. The firm uses Periodic Inventory System and FIFO method for inventory valuation. During the year the inventory quantities purchases, purchases returns, and sales were as follows. Quantity in

Units Unit Cost Total Cost (Rs.)

January 01 Inventory 1,000 Rs.10.00 10,000 April 03 Credit purchases 2,000 Rs.11.00 22,000 July 08 Credit purchases 3,000 Rs.12.00 36,000 July 18 Returns (100) Rs.12.00 (1,200) September 10 Cash purchases 2,500 Rs.15.00 37,500 September 17 Returns (150) Rs.15.00 (2,250) Goods available for sale 8,250 Units sold during the year 5,000 Inventory December 31 3,250

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REQUIRED (1) Give dated general journal entries for the above transactions and an adjusting entry to

record merchandise inventory at December 31. Indent and narrate each entry. (2) Compute the cost of inventory at December 31. (3) The returns being immaterial, you can ignore them while assigning value to inventory

but you need quote the Accounting Principle that permits you to do so. Question # 36: 1993 Private – UOK The following data relate to the mineral water inventory of Milo Company, which uses a period inventory system: January 01, Beginning Inventory 80,000 Liters at Rs.0.40 Rs.32,000 January 13, Purchases 200,000 Liters at Rs.0.42 Rs.84,000 January 15, Purchased 300,000 Liters at Rs.0.41 Rs.123,000 January 30, Purchased 100,000 Liters at Rs.0.? ? January 31, Ending Inventory 120,000 Liters at Rs.0. ? ? January 31, Cost of goods sold Rs.2,33,200 REQUIRED Assuming the use of LIFO Method:

(1) Determine the cost of the ending inventory. (2) Determine the unit cost and total cost of the January 30, Purchases.

Question # 37: 1991 Regular & Private – UOK Merchandise Inventory on June 01, 1991 Rs.30,000, Purchase during the month of June Rs.90,000, Freight in Rs.30,000, Purchases Returns Rs.4,000, Purchase Discount Rs.1,000, Sales Rs.1,35,000. Sales were made a Gross Profit of 30%. REQUIRED From the data given above estimate the cost of Inventory June 30, 1991. Question # 38: 2010 Private – UOK Inam Company’s beginning inventory and purchases during the fiscal year ended June 30, 2010 are as follows: Units Per Units Jul. 1, 09 Inventory 1,000 50.00 Jul. 10, 09 Purchases 1,200 52.50 Aug. 30, 09 Purchases 800 55.00 Oct. 1, 09 Purchases 2,000 56.00 Dec. 15, 09 Purchases 1,500 57.00 Feb. 1, 10 Purchases 700 58.00 Mar. 20, 10 Purchases 1,370 60.00 May 21, 10 Purchases 450 62.00 The company uses the Periodic Inventory System and the Co. sold 5,800 units for total amount of Rs.536,000 during the year. REQUIRED Determine the cost of ending inventory on June 30, 2010, under each of the following inventory costing methods:

(a) FIFO (b) LIFO (c) Weighted Average (d) Gross Profit Method, assuming that above mentioned sales were made at an estimated

gross profit rate of 40%.

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Question # 39: 2008 Regular – UOK Bushra – Arshad Firm sells goods at a gross profit of 40% of sales. Following are the information related to sale & purchase of merchandise for the month of November, 2008: Sales (net) during the month 300,000 Merchandise inventory (1.11.2008) 9,600 Purchases (net) during the month 192,000 During the month a certain class of merchandise costing to Rs.12,000 was sold for Rs.14,400. Expect for this sale, the gross profit on rest of the sales remained normal at 40%. REQUIRED Determine the cost of ending inventory by Gross Profit Method on November 30, 2008. Question # 40: 2012 Regular – UOK On the morning of April 10, 2011 a fire destroyed the entire merchandise inventory in the stores. The merchandise was un-insured. The following data are available: Sales March 1, 2011 to April 9, 2010 Rs.216,000 Inventory March 1, 2011 30,000 Purchases March 1, 2011 to April 9, 2011 189,000 Gross profit on cost 25% REQUIRED Find out the cost of inventory destroyed by fire? Question # 41: 1995 Regular – UOK The following data for the year 1994 has been collected from the books of Bilal & Company: Cost Retail Price Merchandise inventory Jan. 1 55,000 60,000 Purchases during the year 310,000 440,000 Sales during the year 430,000 Sales return & allowance 10,000 REQUIRED Compute the amount of ending inventory by Retail Price Method. Question # 42: 2007 Private – UOK The following data for the year 2006 has been collected from the books of Amjad Company. Cost Price Retail Price Merchandise inventory Jan. 1 80,000 100,000 Purchases during the year 220,000 300,000 Sales during the year 350,000 Sales return & allowance 20,000 Sales discount 10,000 REQUIRED Compute the amount of ending inventory by Retail Price Method. Question # 43: 1989 Regular & Private – UOK State the effects of Under Statement and over statement of ending merchandise inventory on Cost of Goods Sold, net income and Owner’s equity. Question # 44: 1996 Private – UOK What are the effects of overstatement and understatement of beginning and ending inventory on gross profit?

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Inventory Valuation

Chapter # 16

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Sameer Hussain

Question # 45: 2005 Regular – UOK Because of an error in counting for merchandise at Dec. 31, 2003, Mumtaz & Co. overstated the amount of merchandise on hand by Rs.8,000. REQUIRED If the error had not been discovered until the end of 2004, what was its effect on: Net income 2003, Owner’s equity 2003 Net income 2004, Owner’s equity at Dec. 31, 2004 Question # 46: 2007 Private – UOK The condensed Income Statement prepared by Nizam Company for two years are shown below: 2006 2005 Sales 500,000 400,000 Cost of goods sold 410,000 340,000 Gross profit 90,000 60,000 Operating expenses 25,000 20,000 Net income 65,000 40,000 At the end of 2005, the inventory was understated by Rs.15,000 but the error was not discovered until after the accounts had been closed & Financial Statement prepared at the end of 2006. REQUIRED Compute the corrected net income figures of 2005 & 2006.