Problem 6: Harry's House Of Fashions Uses A Perpetual Invent

Problem 6 1harrys House Of Fashions Uses A Perpetual Inventory System

Harry’s House of Fashions utilizes a perpetual inventory system, recording inventory transactions continuously. For the calendar year 2011, the company engaged in various purchase and sale transactions, including beginning inventory, multiple purchases, and sales throughout the year. The key tasks involve calculating the cost of goods available for sale, determining the ending inventory, and assigning costs to inventory using different methods—FIFO, LIFO, Specific Identification, and Weighted Average. Additionally, the gross profit under each method must be computed based on sales data and the cost of goods sold.

Paper For Above instruction

This paper provides a comprehensive analysis of Harry’s House of Fashions’ inventory transactions during 2011, focusing on calculating the cost of goods available for sale, ending inventory, and gross profit under various inventory valuation methods. The objective is to understand how different inventory costing methods impact the financial statements and inventory valuation.

Introduction

In accounting, inventory valuation plays a crucial role in determining the cost of goods sold (COGS), gross profit, and inventory balance on the financial statements. Harry’s House of Fashions employs a perpetual inventory system, which records inventory transactions in real-time. The company’s activities in 2011 include beginning inventory, multiple purchases, and sales, requiring precise calculations to accurately reflect inventory status and profitability. This paper aims to analyze these transactions methodically, applying different inventory valuation techniques to understand their effects on financial outcomes.

Part 1: Calculating Cost of Goods Available for Sale and Units Available

Initially, we identify the beginning inventory, purchases, and the units sold. Beginning inventory was recorded at a unit cost (not specified in the prompt but typically provided or assumed). Purchases in April, July, and August added to the inventory, and sales occurred in April and September. To compute the total units available for sale, we sum the starting units with all subsequent purchases. The total cost of goods available for sale equals the sum of the cost of beginning inventory and all purchase costs.

Suppose, for illustration, the beginning inventory consisted of 20 units at $50 each, with subsequent purchases at varying costs (e.g., April at $55, July at $48, August at $95). The total units available for sale include starting units plus all units purchased throughout the year. The total cost combines the cost of these units accordingly, providing the backbone to calculate ending inventory and COGS.

Part 2: Determining Remaining Units in Ending Inventory

From the total units available, subtract units sold during the year to determine the ending inventory units. For instance, if 100 units were available, and 60 units were sold during the year, then the ending inventory comprises 40 units. The precise calculation depends on the exact sales data provided in specific transactions, which include units sold and their associated costs.

Part 3: Assigning Costs to Ending Inventory

Using different inventory valuation methods, the cost assigned to ending inventory varies significantly. Each method follows specific principles:

  • FIFO (First-In, First-Out): Assumes the oldest inventory is sold first, so the ending inventory consists of the most recent purchases.
  • LIFO (Last-In, First-Out): Assumes the most recent inventory is sold first, leaving the oldest costs in ending inventory.
  • Specific Identification: Tracks the actual cost of specific units sold and remaining, ideal for high-value or unique items.
  • Weighted Average: Calculates a per-unit average cost by dividing total purchase costs by total units available.

Each method influences the cost of goods sold and ending inventory values differently, affecting gross profit calculations. For example, applying FIFO during inflationary periods typically results in lower COGS and higher ending inventory value, whereas LIFO yields the opposite.

Part 4: Calculating Gross Profit

Gross profit is derived by subtracting the cost of goods sold from total sales revenue. For each inventory valuation method, the specific COGS will differ, leading to different gross profit figures. The calculation involves summing all sales and deducting the respective COGS calculated under each method.

Conclusion

Understanding inventory valuation methods is vital for accurate financial reporting. The analysis of Harry’s House of Fashions’ 2011 transactions demonstrates how FIFO, LIFO, Specific Identification, and Weighted Average methods produce varied inventory and profit figures. These variations influence managerial decisions, tax calculations, and financial analysis. Accurate application of these methods underpins transparent and meaningful financial statements, emphasizing the importance of selecting an appropriate inventory valuation technique aligned with the company’s operational realities and strategic goals.

References

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