Financial Accounting-II -Inventories and Cost of goods sold (COGS)
COGS & Ending inventory calculation
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2014 Fall Q. No. 1a
Sam’s company purchased merchandise to be resold at increasing costs during the year 2010. The purchases were made at the following costs:
[10]
January 1, 2010 (carried over from 2009) 20 units at Rs. 10
January 25, 2010 purchase 40 units at Rs. 11
June 20, 2010 purchase 40 units at Rs. 12
October 10, 2010 purchase 50 units at Rs. 13
i. What are the number of units and the cost of goods available for sale? Assuming the company sold 10 units at the end of each month.
ii. Assuming the LIFO periodic cost flow assumption, what will be the company’s cost of goods sold and ending inventory for the 120 units sold in 2010?
iii. Assuming the periodic weighted-average cost flow assumption, what is the company’s cost of goods sold and ending inventory for the 120 units sold in 2010?
Solution:
i.
Units available for sale = 20 + 40 + 40 + 50 = 150 Units
Cost of goods available for sale = 20 @ Rs. 10 + 40 @ Rs. 11 + 40 @ Rs. 12 + 50 @ Rs. 13 = Rs. 1,770
ii.
Units on hand = 150 units – 120 units = 30 units
Under the LIFO method
Cost of ending inventory Calculation
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| October | 30 | 13 | 390 |
| Total | 30 | 390 |
Cost of goods sold = Cost of goods available for sale – cost of ending inventory = 1,770 – 390 = Rs. 1,380
iii.
Under the weighted average cost (WAC) method
WAC per unit = Cost of goods available for sale / Units available for sale = 1,770 / 150 = Rs. 11.8 per unit
Cost of goods sold = WAC * Units sold = 11.8 * 120 = Rs. 1,416
Cost of ending inventory calculation = WAC * Units on hand = 11.8 * 30 = Rs. 354
PU 2014 Fall Q. No. 1b
On July 1st, 2012 an explosion destroyed a store of raw material. The insurance company has agreed to pay store Rs. 10,000 as a settlement for the inventory destroyed. But an estimate of the amount of inventory lost in needed for insurance purposes. The following information is available:
[5]
Beginning inventory Rs. 24,000
Purchase, January-June 53,000
Sales, January-June 44,000
Inventory not destroyed 2,000
Gross profit margin 20%
Required:
Determine the inventory lost and prepare the journal entry on this store books to recognize lost as well as the insurance reimbursement.
Solution:
Using the gross profit method
Cost of goods available for sale = Beginning inventory + Purchase = 24,000 + 53,000 = Rs. 77,000
Sales = Rs. 44,000
Gross profit margin = 20%
Gross profit amount = 20% of sales = 8,800
Cost of goods sold = Sales – gross profit = 44,000 – 8,800 = Rs. 35,200
Cost of ending inventory before explosion = Cost of goods available for sale – Cost of goods sold = 77,000 – 35,200 = Rs. 41,800
Inventory destroyed = Ending inventory before explosion – Inventory not destroyed = 41,800 – 2,000 = 39,800
Loss of inventory = Insurance receivable – Inventory destroyed = 10,000 – 39,800 = Rs. 29,800
Journal entry
Insurance receivable a/c Dr. Rs. 10,000
Loss of inventory a/c Dr. Rs. 29,800
Inventory a/c Rs. 39,800
(T0 record the loss of inventory and partially settled by the insurance company)