FINANCIAL ACCOUNTING ANALYSIS

PRESENTED TO: SIR MUHAMMAD MEHMOOD SHAH

PRESENTED BY: MUHAMMAD HUSSAIN MOHUDDIN S2020302005

AMNA IFTIKHAR S2020277004

SAMIA MAZHAR S2020277009

ASAD MUNIR S2020302010

TOPIC: MERCHANDISE

SECTION B
Merchandising is a set of activities that merchandisers do to sell
their product or services to the target customers for the purpose
of generating revenue and to satisfy their customers.
 Q: Discuss some measures that should be taken to
maintain control over merchandise inventory?
• Don't purchased inventory without proper authorization, purchase only from approved
vendors and within acceptable dollar ranges.
• Track and properly document inventory when received. At time of delivery, a count of
inventory received should be completed and each item should be examined for damage.
• Damaged inventory should be properly recorded and then should be used, disposed of, or
returned to the vendor.
• A physical count of inventory should be completed once a year to track inventory shrinkage
due to theft, damage, and errors.
• When sales are made, the inventory sold should be properly recorded and removed from the
inventory count.
Q: During periods of rising costs, which inventory costing method produces the highest gross
profit?

• During periods of rising costs, the FIFO inventory costing method produces the
highest gross profit
• As you have bought the inventory when costs of the materials were low and you
bought them on low prices so now at the time of rising cost you can sale your
inventory according to the rising costs
• It will bring great gross profit to your company's financial statement
 Q
Computing the rate of inventory turnover and days’ sales in
inventory

Broadway Communications reported the following figures in its annual

financial statements:
Cost of Goods Sold $ 18,400

Beginning Merchandise Inventory 560

Ending Merchandise Inventory 450

Inventory turnover is 36.44 times and days’ sales in inventory is 10.02 days.

SOLUTION
(Beginning merchandise inventory
Average merchandise inventory =
+ Ending merchandise inventory) / 2
     

  = ($560 + $450) / 2
     

  = $505
Cost of goods sold
Inventory turnover =
/ Average merchandise inventory
     

  = $18,400 / $505
     

  = 36.44 times per year

Days’ sales in inventory = 365 days / Inventory turnover

     

  = 365 days / 36.44 times

     

  = 10.02 days
 Q
Compute ending merchandise inventory and cost of goods sold for Flexion using the FIFO inventory
costing method.

Jul. 1 Beginning merchandise inventory 6 units @ $ 60 each

      8 Purchase 5 units @ $ 67 each

    15 Purchase 10 units @ $ 70 each

    26 Purchase 5 units @ $ 85 each

At July 31, Flexion counts four units of merchandise inventory on hand.

 SOLUTION
Goods Available for Sale:

Unit Total
Date Quantity Cost Cost
Jul. 1 6 units × $ 60 = $ 360
8 5 units × $ 67 = $ 335
15 10 units × $ 70 = $ 700
26 5 units × $ 85 = $ 425
Totals 26 units   $ 1,820

Ending Merchandise Inventory = 4 units × $85/ unit

= $ 340

Cost of Goods Sold:

Cost of Goods Available for Sale $1,820
Ending Merchandise Inventory (340)
Cost of Goods Sold $ 1,480
 Alternatively, Cost of Goods Sold

Unit Total
  Quantity Cost Cost
  6 units × $ 60 = $ 360
  5 units × $ 67 = $ 335
  10 units × $ 70 = $ 700
  1 units × $ 85 =$ 85
Totals 22 units   $ 1,480
Q: When using a perpetual inventory system and the weighted-average
inventory costing method, when does the business compute a new
weighted-average cost per unit?
ANSWER

• When using a perpetual inventory system and the weighted-average inventory costing method, a new
weighted average cost per unit is computed after each purchase.
• Formula: Weighted average cost per unit = Cost of goods available for sale / Number of units available

Q: What account is debited when recording the adjusting entry to

write down merchandise inventory under the LCM rule?
ANSWER
• In the adjusting entry to write down merchandise inventory, Cost of Goods
Sold is debited (and Merchandise Inventory is credited).
 Boston Cycles started October with 12 bicycles that cost $42 each. On October 16, Boston
bought 40 Bicycles at $68 each. On October 31, Boston sold 34 bicycles for $100 each.

• FIFO Method
  Purchases Cost of Goods Sold Inventory on Hand

Date Quantity U.C T.C Quantity U.C T.C Quantity U.C T.C
Oct. 1             12 units 42 12×42=504 $

12 units 42 12×42=504 $
16 40 units 68 2,720       40×68=2720 $
40 units 68 Total (=3224 $)

504
12 units 42
31       22 units 68 1496 18units 68 18*68=1224 $
Total(=2000)
Total 40 Units =2720$ 34 Units =2000 $ 18 Units =1224 $
 LIFO Method
  Purchases Cost of Goods Sold Inventory on Hand

Date Quantity U.C T.C Quantity U.C T.C Quantity U.C T.C
Oct. 1             12 units 42 12×42=504 $

12×42=504 $
12 units 42
16 40 units 68 2,720       40 units 68 40×68=2720 $
Total (=3224 $)

12*48=504
31       34 Units 68 34*68=2312 12 units 42 6*68=408
6 units 68
Total (=912 $)

Total 40 Units =2720$ 34 Units =2312 $ 18 Units = 912 $

 Average Method
  Purchases Cost of Goods Sold Inventory on Hand

Date Quantity U.C T.C Quantity U.C T.C Quantity U.C T.C
Oct. 1             12 units 42 12×42=504 $

16 40 units 68 2,720       52 units 62 52*62=3224 $

31       34 Units 62 34*62=2108 18 units 62 18*62=1116 $

Total 40 Units =2720$ 34 Units =2108 $ 18 Units = 1116 $

Weighted average cost per unit = Cost of goods available for

sale / Number of units available
= ($504 + $2,720) / (12 units + 40 units)
= $3,224 / 52 units
= $62 per unit
Q. Which principle states that businesses should use the same
accounting methods and procedures from period to period?
ANSWER:
• The consistency principle states that businesses should use the same accounting methods
and procedures from period to period.

Q. What does the disclosure principle require?

ANSWER
The disclosure principle requires that a company must report enough information in its
financial statements for outsiders to make knowledgeable decisions about the company.
Q- Computing periodic inventory amounts—Weighted-average
Compute ending merchandise inventory and cost of goods sold for Flexion using the weighted-average
inventory costing method. At July 31, Flexion counts four units of merchandise inventory on hand.

Jul. 1 Beginning merchandise inventory 6 units @ $ 60 each

      8 Purchase 5 units @ $ 67 each

    15 Purchase 10 units @ $ 70 each

    26 Purchase 5 units @ $ 85 each

 SOLUTION

Goods Available for Sale:

Date Quantity Unit Cost Total Cost
Jul. 1 6 units × $ 60 = $ 360
8 5 units × $ 67 = $ 335
15 10 units × $ 70 = $ 700
26 5 units × $ 85 = $ 425
Totals 26 units   $ 1,820

$1,820 cost of goods available for sale

Weighted-Average cost per unit =
/ 26 units available for sale
     

  = $70 per unit

Ending Merchandise Inventory:

4 units × $70 per unit
=
 
 

$280
=
Cost of Goods Sold:
Cost of Goods Available for Sale $ 1,820

Ending Merchandise Inventory (280)

Cost of Goods Sold $ 1,540

Alternatively, Cost of Goods Sold:

22 units sold × $70 per unit

=

 
 

$1,540
=
Q. How is inventory turnover calculated, and what does it
measure?
ANSWER:
Inventory turnover measures how rapidly merchandise inventory is sold during a period (the number of
times a company sells its average level of merchandise inventory during a period). Inventory turnover =
Cost of goods sold / Average merchandise inventory, where Average merchandise inventory =
(Beginning merchandise inventory + Ending merchandise inventory) / 2.

Q. How are days’ sales in inventory calculated, and what does it measure?
ANSWER:
Days’ sales in inventory measures the average number of days merchandise inventory is held by a
company. Days’ sales in inventory = 365 days’ / Inventory turnover.
 Q-Correcting an inventory error—two years
1. 2019, NI $36,500
 Nature Foods Grocery reported the following comparative income statements for the years ended June 30, 2019 and 2018:

During 2019, Nature Foods Grocery discovered that ending 2018 merchandise inventory was overstated by $5,500.
Requirements
1. Prepare corrected income statements for the two years.
2. State whether each year’s net income—before your corrections—is understated or overstated, and indicate the amount of the understatement
or overstatement.
Solution:
Requirement 1:
Corrected income statements:

NATURE FOODS GROCERY

Income Statements
Years Ended June 30, 2019 and 2018
                   

      2019     2018  
                   
  Sales Revenue     $ 134,000       $ 119,000  
  Cost of Goods Sold:                
  Beginning Merchandise Inventory   $ 11,500 (a)
      $ 14,000    
  Net Cost of Purchases   78,000       67,000    
  Cost of Goods Available for Sale   89,500       81,000    
  Less: Ending Merchandise Inventory   18,000       11,500 (a)
   
  Cost of Goods Sold     71,500       69,500  
  Gross Profit     62,500       49,500  
  Operating Expenses     26,000       21,000  
  Net Income     $ 36,500       $ 28,500  
                   
 Calculations:
(a)
   
  $ 17,000 Incorrect Merchandise Inventory
  Overstatement
(5,500)
  $ 11,500 Correct Merchandise Inventory

Requirement 2
Before correction, net income for the year ended June 30, 2019 is understated by $5,500 and net income for the year ended June 30, 2018 is overstated by $5,500.
Calculations:

       
    Year Ended  
    June 30, 2019   June 30, 2018
Incorrect net income   $ 31,000   $ 34,000
Correct net income (b)    
(36,500) (28,500)
Overstatement (understatement) of net income   $   $ 5,500
(5,500)
         
(b)
Calculated in Requirement 1.