INSTITUTE OF BUSINESS ADMINISTRATION KARACHI

PRINCIPLES OF ACCOUNTING
SPRING 2021
Assignment 3
Total Marks 10

1. Pioneer Company sells medical supplies to customers. Review the following transactions and
prepare the journal entry or entries if Pharmaceutical Supplies uses:
A. the perpetual inventory system
B. the periodic inventory system
July 9 A customer purchases 50 pairs of crutches at a sales price of $20 per pair. The cost to
Pioneer Company per pair is $8.00. The terms of the sale are 5/10, n/30, with an invoice date of
July 9.
July 12 The customer who made the July 9 purchase returns 9 of the pairs to the store for a full
refund, claiming they were the wrong size. The crutch pairs were returned to the store’s
inventory at $8.00 per pair.
July 18 The customer pays in full for the remaining crutches, less the return.
(3 marks)

2. You have decided to open up a small convenience store in your hometown. As part of the initial set-
up process, you need to determine whether to use a perpetual inventory system or a periodic inventory
system.

a. Compare the perpetual and periodic inventory systems.

b. Describe the benefits and challenges of each system as it relates to your industry and to your
business size.

c. Compare at least one example transaction using the perpetual and periodic inventory systems
(a purchase transaction, for example).

d. Describe the impact each system has on your financial statements.

e. Decide which system would be the best fit for your business, and support your decision with
reasons.

(3 marks)
 B) Perpetual: By using the perpetual system, I can compare both my inventory amount that has
been recorded and the inventory amount by physical count. Through this, I can be aware of
missing or stolen inventory.

I can stay informed if I am running short on a certain good because I will have the inventory
count with me. This active inventory surveillance might also help me to make certain decisions
or predictions.

Considering the size of my business, it is perhaps not optimal to use a perpetual system as I will
need to compute the inventory count every single time even if the business is small.

It might be expensive for me as the business I have decided to open is a small store.

Periodic: The first and foremost benefit of this system is that it is really simple as compared to
the perpetual system.

This system will be really cheap as compared to the perpetual system; as a small business, it will
be optimal for me to choose the periodic system.

This system will definitely require less work load as the inventory count and the cost of goods
sold is computed at the end of the period.

I might experience inventory loss, theft, shoplifting because the inventory is only counted at the
end of the period and there is no active surveillance of the count.

3. Following data relates to product B52.

Transaction Type # of Units Unit Cost

Beginning Inventory 10 $120

Purchased 40 $125

Sold 20

Purchased 50 $130

Sold 20

Sold 30

Purchased 40 $132

Sold 20

There are 50 units in ending inventory.

Compute cost of goods sold and ending inventory under each of the following methods:

a. FIFO periodic
b. FIFO perpetual
c. LIFO periodic
d. LIFO perpetual
(4 marks)