UNSW Business School

School of Accounting, Auditing & Taxation

ACCT2511 – Financial Accounting Fundamentals

Topic 2 - Inventory
Tutorial Question Answers

Trotman, Humphreys, Clout & Morgan 7th customised edition Part 2:

 Problem 12.3
 Problem 12.6 – Parts (1), (2) and (4) only
 Problem 12.13

Or
Trotman, Carson & Morgan 7th ed 2019 (TCM):
• Problem 9.4
• Problem 9.7 – parts (1), (2) and (4) only
• Problem 9.13

Discussion Starter for Tutorial: Additional Question 1

(1) Describe the two main costing systems used by manufacturers to assign costs
to cost objects, and explain how the two approaches differ.
(2) For each of the two costing systems, provide at least one example of a
product that would be best suited to that system.
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Discussion Starter for Tutorial: Additional Question 1
Answer:
Job-order costing and process costing systems. For job-order manufacturing
systems, manufacturing costs are accumulated for each job. In a job-order firm,
collecting costs by job provides vital information for management. Once a job is
completed, the unit cost can be obtained by dividing the total manufacturing costs
by the number of units produced.

irms in process-based environments mass-produce large quantities of very similar

or homogeneous products. Each product is essentially indistinguishable from its
companion product. Process firms accumulate production costs by process or by
department for a given period of time. The output for the process for the same
period of time is measured. Unit costs are computed by dividing the process costs
for the given period by the output of the period.

(1)

Job-order costing – some product (cost object is the product) examples:

 Jet-fighter planes that are custom ordered

 Luxury boats that are custom designed
 Airplanes that have been custom created for airlines

Process costing –product cost object examples:

 Juice, soft drink (mass produced)

 Crude oil

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Q2. THCM Problem 12.3 /TCM Problem 9.4
Please note: the year and company name is the only difference between these
questions. In TCHM it is Topaz Ltd in 2022, and in TCM it is Bragg Ltd in 2019.

1
Topaz/Bragg Ltd
General journal
a Perpetual inventory DR$ CR$
Inventory 110 000
Accounts payable 110 000

Accounts receivable 180 000

Sales revenue 180 000

Cost of goods sold expense 120 000

Inventory 120 000
COGS: 50% mark-up 180 000 x 100/150 = $120 000

Inventory shortage expense 1 400

Inventory 1 400
Shortage: record indicates inventory should be $30 000 + $110 000 – $120 000 =
$20 000 but only $18 600 is on hand

Operating expenses 35 000

Cash 35 000

Profit and loss summary 156 400

Cost of goods sold expense 120 000
Inventory shortage expense 1 400
Operating expenses 35 000

Sales revenue 180 000

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 Profit and loss summary 180 000

Profit and loss summary 23 600

Retained profits 23 600
b Periodic inventory DR$ CR$

Purchase expense 110 000

Accounts payable 110 000

Accounts receivable 180 000

Sales revenue 180 000

Operating expenses 35 000

Cash 35 000

Profit and loss summary 175 000

Purchase expense 110 000
Operating expenses 35 000
Inventory (1 July 2021) 30 000

Inventory (30 June 2022) 18 600

Sales revenue 180 000
Profit and loss summary 198 600

Profit and loss summary 23 600

Retained profits 23 600

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2 a Perpetual inventory
Topaz Ltd/ Bragg Ltd
Income Statement for year ended 30 June 20XX
$ $
Sales 180 000
Less: Cost of goods sold 120 000
Inventory shortage 1 400 121 400
Gross profit 58 600
Less: Operating expenses 35 000
Net profit 23 600

b Periodic inventory
Topaz Ltd/Bragg Ltd
Income Statement for year ended 30 June 20XX
$ $
Sales 180 000
Less: Cost of goods sold
Inventory 1 July 2021 30 000
Purchases 110 000
Available for sale 140 000
Less: Inventory 30 June 2022 18 600
Cost of goods sold 121 400
Gross profit 58 600
Less: Operating expenses 35 000
Net profit 23 600

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Q3. THCM Problem 12.6 /TCM Problem 9.7 – Parts (1), (2) and (4) only
Please note: the year is the only difference between these questions. In TCHM it
is 2022 and in TCM it is 2019.

1
(a) LIFO
Subsidiary inventory record card
Item: Prams
Month Purchases Sales Balance
Units Price per Amount Units Price Amou Units Price per Amount
unit per unit nt unit
$ $ $ $ $ $
Jan 20 5 100 20 5 100
Feb 15 5 75 5 5 25
Mar 30 6 180 5 5 25
30 6 180
Apr 30 6 180 5 5 25
May 35 7 245 5 5 25
35 7 245
June 30 7 210 5 5 25
5 7 35
Cost of sales = 465

(b) FIFO

Month Purchases Sales Balance

Unit Price Amount Units Price per Amount Units Price per Amou
s per unit unit nt
unit
$ $ $ $ $ $
Jan 20 5 100 20 5 100
Feb 15 5 75 5 5 25
Mar 30 6 180 5 5 25
30 6 180
Apr 5 5 25
25 6 150 5 6 30
May 35 7 245 5 6 30
35 7 245
June 5 6 30
25 7 175 10 7 70
Cost of sales = 455

(c) Moving Average

Month Purchases Sales Balance

Units Price Amount Units Price Amount Units Price Amount
per unit per unit per unit

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 $ $ $ $ $ $
Jan 20 5 100 20 5 100
Feb 15 5 75 5 5 25
Mar 30 6 180 35 5.86 205
Apr 30 5.86 175.80 5 5.86 29.30
May 35 7 245 40 6.86 274.30
June 30 6.86 205.80 10 6.86 68.60

Cost of 456.6
sales =

2
Calculate sales revenue:
$
Sales 15 @ 10 150
30 @ 11 330
30 @ 12 360
840

(a) LIFO (b) FIFO (c) Moving

Average
$ $ $
Sales Revenue 840 840 840
Less Cost of Goods 465 455 456.60
Sold
Gross Profit 375 385 383.40

4 Compare the effects of LIFO and FIFO on balance sheet valuation of inventory
and net profit in periods of: (a) rising prices; and (b) falling prices.

a In periods of rising prices, LIFO provides a lower inventory valuation (the lower
priced, earlier purchased units included in ending inventory), a higher cost of sales
figure (selling the higher priced last units first in COGS) and thus a lower net profit
figure compared to FIFO.

b In periods of falling prices, LIFO provides a higher inventory valuation (the more
higher priced earlier units included in ending inventory), a lower cost of sales figure
(selling the lower priced units first in COGS) and a higher net profit figure compared
to FIFO.

Q4. THCM Problem 12.13 / TCM Problem 9.13

1 What would be the journal entry for the write-downs?

DR Inventory write-down expense $43m

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 CR Inventory $43m
(inventory write down of premium red wine and white wine)

Notes: * This is an expense account that could be given a number of different names
based on a company’s chart of accounts.
The above journal entry assumes there is a single inventory account, allowing a
consolidated single journal entry for the two write-downs.
Alternatively, a company may have different inventory accounts for wine, e.g.,
Inventory – Red Wine; Inventory – White Wine. It could have inventory accounts for
premium wine and regular wine. In this question there is not enough information to
determine this. Below are two journal entries based on the assumption that there are
premium red wine and white wine inventory accounts:

DR Inventory write-down expense $40m

CR Inventory – Premium Red Wine $40m
(inventory write down of premium red wine)

DR Inventory write-down expense $3m

CR Inventory – White Wine $3m
(inventory write down of white wine)

2 Why would a write-down in inventory lead to a possible decline in [the

company’s] share price?

 A write-down in inventory is treated as an expense => reduces net profit for the
period => Lead to a drop in share price.
 Market may also have a negative reaction to management’s handling of the
situation

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