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Week 8 Tutorial Solutions
Week 8 Tutorial Solutions
Lee Ltd is using the FIFO method of inventory costing and Lam Ltd is using the LIFO
method. Under FIFO, the latest goods purchased remain in inventory. Thus, the
inventory on the statement of financial position should be close to current costs. The
reverse is true of the LIFO method. Lee Ltd will have the lower gross profit because
cost of goods will include a higher proportion of goods purchased at earlier (higher)
costs.
2.
a) Explain the components of the cost of inventory according to AASB102
Average
The average cost is calculated from the goods available for sale, on a periodic basis
(weighted average) or as each inventory is purchased (moving average).
FIFO
Assumes that inventory is sold in the order of the first in first out and that inventory
on hand is the most recently purchased.
LIFO
Assumes that inventory is sold in the order of the last in first out and that inventory
on hand is the oldest purchased.
Net realizable value is defined in AASB 102 para 6 as “the estimated selling price
in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale”.
Examples of these costs include:
Transport out
Carry bag for customer
Handling costs to repackage
d) Explain the lower of cost and net realizable value rule according to the accounting
standard
According to the accounting standard (AASB 102 par 9) inventory should be valued
at the lower of cost and NRV. This rule is based on the principle of conservatism.
This is done to avoid overstating the asset and profit.
e) Briefly explain what factors may lead to the Net Realizable value falling below the
cost of inventory
Rye Sails
(b) FIFO
(1) Ending Inventory
*1,600 – 1,350
Average Cost
(c) (1) As shown in (b) above, FIFO produces the highest inventory amount,
$13,250.
4. Rihanna Ltd is a new business that sells perfume bottles. The business had started
operations with 100 bottles purchased for $40 each. During the first month of operation
the following purchases were made:
1 July 2019 Purchased 300 bottles (invoice price = $38.00). The freight and
insurance cost on the entire order was $1,800.
18 July 2019 Purchased 200 bottles from a different supplier whose normal retail
price was $40.00 per unit. However, the supplier granted Rihanna Ltd a trade
discount of 10% and offered free freight and insurance.
The accounting standard requires that the cost of inventory is purchase price plus
transport in if material. It also requires trade discounts to be deducted if material
Transport in is material if they affect decision making
Not sure – go to guideline
1,800/(11,400) = 15.8% therefore influences decision making and is material and
included in cost
50 @ $44 =
Next latest 50 x $44 50 @ $128 $2,200
Total $9,080
5. Hardwick Artwork Pty Ltd is in business selling framed prints of classic paintings. The
prints are produced on high-quality paper and to the highest possible standards, so
they are expensive to purchase from the importer.
Purchase of the city scene print requires payment of an import duty of $50 per print.
The latest selling price of city scene prints was $650 per print.
The rural scene print has not sold any copies since March 2014. In late June 2014, a
country motel chain offered $300 each for all the rural scene prints that Hardwick
Artwork has left, if Hardwick Artwork will pay the $30 per print freight cost. Hardwick
Artwork management realises this is the highest offer they are likely to receive.
Required:
Calculate the following:
(i) Ending inventory value for the city scene print as at 30 June 2014, using a FIFO
cost flow assumption.
(ii) Cost of goods sold for the year ended 30 June 2014 and ending inventory as at
30 June 2014 for the rural scene print, using the weighted-average cost flow
assumption.
Justify your answers and show all workings.
(i)
The accounting standard requires that the cost of inventory is purchase price plus import
duties if material. Import duties are material if they influence economic decisions. Not sure –
go to guidelines
50/350 = 14.29% therefore influence economic decisions and is material and included in
cost
= $6,100
(ii)
The accounting standard requires that the cost of inventory is purchase price. Nothing else
relevant.