Comprehensive Problem 2 Part 2 Perpetual Data Ts Purchase

Comprehensive Problem 2 Part 2 Perpetual Data186 Ts Purchased 20

Identify the specific inventory transactions and costs during August, including purchases, sales, payments, returns, and shipping costs. Use these data to prepare journal entries for the company's perpetual inventory system, calculate cost of goods sold (COGS), and determine gross profit for the period. Additionally, analyze the impact of different inventory flow methods on financial results, considering the periodic average cost method as well. Provide detailed calculations and explanations demonstrating the application of perpetual inventory accounting and cost flow assumptions to produce accurate financial statements.

Paper For Above instruction

The company Ts (Ts) engaged in multiple inventory transactions during August, involving purchases, sales, returns, and payments that significantly impact its financial statements. Implementing the perpetual inventory system requires meticulous tracking of each transaction’s effect on inventory and cost calculations, which enables real-time updates to inventory balances and COGS. This detailed analysis will walk through the journal entries, calculations, and financial implications for the period, emphasizing how inventory flow assumptions influence results.

Firstly, the purchase transactions from Frooty set the foundation for inventory accumulation. On August 6th, Ts bought 200 long sleeve blue shirts at $3 each FOB-SP, with shipping costs of $40. The FOB-SP (free on board – shipping point) indicates that ownership transfers at the shipping point, meaning Ts bears transportation costs upon shipment. The journal entry would debit inventory for the purchase amount ($200 x $3 = $600) plus shipping costs ($40), totaling $640. Similarly, on August 8th, Ts purchased 500 short sleeve blue shirts at $2.50 each FOB-D with shipping costs of $50. FOB-D (destination) implies ownership transfers upon delivery, so shipping costs are borne by the seller, and Ts only records the inventory cost ($500 x $2.50 = $1250). Conversely, on August 11th, Ts bought 400 long sleeve blue shirts at $3.50 each FOB-D, incurring $40 shipping costs, which Ts would also record as part of inventory cost.

These purchase entries directly influence the inventory valuation. Cost calculations follow the perpetual inventory method, updating after each transaction to provide real-time inventory and COGS data. For example, when Ts sells 290 long sleeve blue shirts on August 12th at $8 each, we calculate COGS based on the inventory costing method adopted. If FIFO is used, the oldest inventory ($3 per shirt from the August 6th purchase) would be consumed first, resulting in a COGS of 290 x $3 = $870. Under weighted average cost, the company calculates an average cost per unit after each purchase, which affects the COGS and gross profit.

Shipping costs incurred on sales, such as the $30 for the sale on August 12th, are typically classified as selling expenses, not part of COGS, but they influence overall profitability. Return transactions, such as RSkool’s return of 100 short sleeve shirts on August 22nd, require decreasing inventory and adjusting COGS accordingly, often based on the same inventory flow assumption.

Payments made on August 14th and 31st for prior purchases and receivables from RSkool are recorded as cash disbursements and receipts, affecting cash flow statements but not inventory valuation directly. The collection of payments—such as on August 21, 29, and 30—are recorded as accounts receivable and cash, impacting income and cash flow but not inventory directly.

The alternative inventory flow method, using periodic weight average, involves calculating an average cost at month-end, which simplifies the process but may distort profit margins during periods of fluctuating purchase prices. Applying the periodic average cost method to May data demonstrates how gross profit can vary with inventory costing assumptions. Under the perpetual system, each sale reflects the specific inventory layer, enabling more precise profit tracking.

To calculate gross profit under the perpetual system, we determine the COGS based on the inventory costs accumulated from purchases, subtract it from total sales revenue, and identify the gross profit. For example, if FIFO is assumed, early purchases at lower costs are matched with sales, generating potentially higher gross profits during inflationary periods. Conversely, LIFO could produce lower profits by matching recent higher costs against sales, impacting tax liabilities and financial analysis.

In addition, the analysis of May's inventory data utilizing the average cost method illustrates how averaging inventory costs impacts gross profit calculations, smoothing out cost fluctuations over the period. The May data, with beginning inventory and multiple purchases, provides a basis for computing a weighted average cost per unit, then applying it to calculate COGS and gross profit.

In conclusion, the choice of inventory flow method—FIFO, LIFO, or weighted average—affects the valuation of inventory, COGS, gross profit, and taxable income. The perpetual system offers real-time tracking that is advantageous for operational decision-making, while periodic methods provide a simpler but less precise picture. For Ts, using the perpetual inventory system with an appropriate flow assumption is critical for accurate financial reporting and tax compliance, especially during periods of fluctuating prices. Proper understanding and application of these methods enable the company to optimize inventory management and financial outcomes.

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