ACC502 GCU Mod 3 Merchandising & Inventory Accounting Problems Paper See attached. Create excel spreadsheet. Complete the following exercises and problems in Excel:
For all problems, assume the perpetual inventory system is used unless stated otherwise. Round all
numbers to the nearest whole dollar unless stated otherwise.
Journalizing purchase and sale transactionsJournalize the following transactions that occurred in
September 2015 for Aquamarines. No explanations are needed.
Identify each accounts payable and accounts receivable with the vendor or customer name.
Sep. 3Purchased merchandise inventory on account from Shallin Wholesalers, $5,000. Terms 1/15,
n/EOM, FOB shipping point.
4Paid freight bill of $80 on September 3 purchase.
4Purchased merchandise inventory for cash of $1,700.
6Returned $500 of inventory from September 3 purchase.
8Sold merchandise inventory to Hermosa Company, $6,000, on account. Terms 2/15, n/35. Cost of
9Purchased merchandise inventory on account from Thomas Wholesalers, $8,000. Terms 2/10, n/30,
10Made payment to Shallin Wholesalers for goods purchased on September 3, less return and discount.
12Received payment from Hermosa Company, less discount.
13After negotiations, received a $200 allowance from Thomas Wholesalers.
15Sold merchandise inventory to Jordan Company, $2,500, on account. Terms 1/10, n/EOM. Cost of
22Made payment, less allowance, to Thomas Wholesalers for goods purchased on September
9.23Jordan Company returned $400 of the merchandise sold on September 15. Cost of goods,
$160.25Sold merchandise inventory to Smithsons for $1,100 on account that cost $400. Terms of 2/10,
n/30 were offered, FOB shipping point. As a courtesy to Smithsons, $75 of freight was added to the
invoice for which cash was paid by Aquamarines.26After negotiations, granted a $100 allowance to
Smithsons for merchandise purchased on September 25.29Received payment from Smithsons, less
allowance and discount.30Received payment from Jordan Company, less return.
For all problems, assume the perpetual inventory system is used unless stated otherwise.
Accounting for inventory using the perpetual inventory system—FIFO, LIFO, and Weighted-Average
Fit World began January with merchandise inventory of 80 crates of vitamins merchandise on account as
Jan. 5Purchase140 crates @ $ 55 each
13Sale160 crates @ $100 each
18Purchase160 crates @ $ 60 each
26Sale170 crates @ $110 each
1.Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the
company’s cost of goods sold, ending merchandise inventory, and gross profit.2.Prepare a perpetual
inventory record, using the LIFO inventory costing method, and determine the company’s cost of goods
sold, ending merchandise inventory, and gross profit.3.Prepare a perpetual inventory record, using the
weighted-average inventory costing method, and determine the company’s cost of goods sold, ending
merchandise inventory, and gross profit. (Round weighted average cost per unitto the nearest cent and
all other amounts to the nearest dollar.)4.If the business wanted to pay the least amount of income
taxes possible, which method would it choose?
Merchandising and Inventory Accounting
Companies are typically classified as being service companies, merchandising companies, or
manufacturing companies. Service companies provide a service rather than selling a tangible product.
Examples of service companies include electricians, accounting firms, and hair salons. Merchandising
and manufacturing companies, however, sell tangible goods as their primary course of business.
Merchandising companies that sell to consumers are called retailers, and companies that sell to retailers
are called wholesalers. The difference between merchandising companies and manufacturing
companies is that merchandising companies buy their products to sell, whereas manufacturing
companies purchase raw materials that they convert into a product to sell. Department stores such as
Wal-Mart, K-Mart, and Target are merchandising companies. Many manufacturing companies such as
Sony, General Foods, and Cuisinart sell their products to merchandisers to be sold ultimately to the
consumer. This module explores the challenges that arise in accounting for merchandising companies.
Merchandising Operations and Inventory
Accounting for merchandising companies requires careful tracking of inventory. This includes keeping
track of the value of the products purchased, merchandise sold, and inventory on hand. For
merchandising companies, inventories are assets that are held for sale in the ordinary course of
business. Inventory is frequently the largest current asset of a merchandising company (Kieso,
Weygandt, & Warfield, 2009). When inventory is purchased, it is considered a current asset. When it is
sold, the cost of that inventory must be matched against the revenue in the period of the sale, in
accordance with the matching principle. The expense of inventory is called the cost of goods sold.
To calculate the cost of goods sold, the beginning value of inventory is added to the cost of goods
purchased during the period. The cost of goods available for sale represents the cost of all merchandise
that could have been sold during the period, which is equal to the cost of goods sold plus the ending
value of inventory. The cost of goods sold is shown as an expense item on the income statement, and
the ending inventory is shown as a current asset on the balance sheet. Most companies control their
inventory through point-of-sale (POS) systems and, therefore, can keep a current, perpetual track of
inventory on hand and current account of cost of goods sold. Under a perpetual inventory system, the
value of inventory and the cost of goods sold are always up to date in the accounting system as each
sale transaction is recorded. When sales of merchandise are recorded, the sale is recorded at the selling
price by debiting accounts receivable or cash and crediting sales revenue. At the same time, in a
perpetual inventory system, the cost of the merchandise sold is transferred from the inventory account
to the cost of goods sold account by debiting cost of goods sold and crediting merchandise inventory for
the original cost of the inventory. Inherently, the gross profit on a sale is reflected in the income
statement, since that is where the sales revenue and the cost of goods sold are both accounted for.
The challenge in recording sales transactions for both merchandising and manufacturing companies is
assessing the cost of the specific inventory sold. Some types of inventory are unique by nature and,
therefore, can be tracked via the specific identification method. Cars, for example, are generally tracked
individually and based on precise features and a unique vehicle identification number. Under the
specific identification method, costs associated with each specific unit of inventory can be transferred
from the merchandise inventory to cost of goods sold at the time of sale. However, most merchandise is
not easily identifiable because many inventory items are homogenous, or similar, to the point that
tracking inventory items individually is difficult, if not impossible. The specific identification method
valuing inventory is an actual cost flow method.
Since most merchandising companies purchase similar products in bulk, it becomes difficult to
determine the specific cost of an individual unit sold. In addition, the cost of acquiring merchandise
usually fluctuates, necessitating the use of cost flow assumptions to track the cost of goods sold. For
merchandise that is not tracked individually, the accountant must make a cost flow assumption to
determine which costs to attach to the units sold and which costs to attach to the units remaining in
Four different inventory cost methods are used to allocate the cost of goods available for sale to the
units remaining in inventory and to the units sold. These methods, which are all acceptable under
Generally Accepted Accounting Principles, are first-in first-out (FIFO), last-in-first-out (LIFO), weightedaverage cost, and specific identification. Specific identification is an actual cost flow method, while FIFO,
LIFO, and weighted-average costing are cost flow assumptions. The chosen cost flow assumption need
not match the physical flow of inventory.
Ending inventory should be valued based on the lower-of-cost-or-market basis (LCM basis), also known
as the replacement cost. This practice can have a major effect on the statements of companies facing
declining costs. Damaged, obsolete, and out-of-season inventory should also be written down to their
current estimated net realizable value if below cost. The LCM adjustment increases cost of goods sold,
decreases income, and decreases reported inventory in the year of the write-down.
The inventory turnover ratio (cost of goods sold divided by average inventory) measures the efficiency
of inventory management. It reflects how many times average inventory was produced and sold during
the period. Analysts and creditors watch this ratio because a sudden decline may mean a company is
facing an unexpected drop in demand for its products or it is becoming careless in its production
The accountant is required to exercise judgment in choosing inventory methods. It is imperative that the
accountant understand the implications for the business when selecting an inventory method and also
comprehend the intricacies of applying that method to purchase and sales transactions. Accounting for a
merchandising company is much more complex than accounting for a service entity due to the valuation
of inventory and calculation of cost of goods sold. The cost of goods sold figure is considered a critical
indicator for financial analysts, as is the gross profit margin. Understanding the methods used to
calculate the cost of goods sold and gross profit will yield a greater understanding of the financial
statements as a whole and lead to a more accurate analysis of a business from the standpoint of an
investor or creditor.
Kieso, D., Weygandt, J., & Warfield, T. (2009). Intermediate accounting (3rd ed.) Hoboken, NJ: John
Wiley and Sons, Inc.
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