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Homework answers / question archive / This Project accounts for 40 % of the Student Final Grade
This Project accounts for 40 % of the Student Final Grade. Question 1: (1* 10: 10 Marks) Alpha company is a trading company that purchases and sales fruits and vegetables. During the year 2020, the company shows the following transactions and events: 1) The company uses the perpetual inventory system to account for its inventory at December 31, 2020 and its financial statements are disclosed without delay. 2) The company records sales when cash is received from customers and delay expenses for the next year. 3) For credit purchase transactions, the accountant debit (merchandise inventory) and credit (accounts receivable). 4) The company assumes the freight charges to its customers. The accountant debit (freight in expenses) and credit (merchandise inventory). 5) One customer returned fruits to Alpha that were damaged. The accountant of the company debit (purchase returns) and credit (accounts payable). 6) The cost of goods sold is determined after each sale as follow: beginning inventory purchases + ending inventory. 7) Net profit is computed by subtracting operating expenses from the cost of goods sold. 8) The accountant records merchandise inventory (stock) in the expenses section of the income statement. 9) The company assumes that physical inventory is not important as it uses the perpetual inventory system during the year. 10) The driver of the company has access to the inventory, he delivers the merchandise, receives the cash and has access to the company books. Required: For each case, identify the anomaly and propose the correct accounting treatment/answer: (1* 10: 10 Marks) Answer
1) The company should physically verify the inventory and ensure it is matched with the system stock before the financial statements are disclosed and reported. Having control over inventory is important because it is of high value and it affects the profitability and liquidity of the firm.
2) The company should account for revenue and expenses in line with accrual concept. As per accrual concept revenue should be accounted when it is earned and expense should be accounted when it is incurred and not when cash is received for sales or paid for expenses.
3) The debit for Merchandise inventory is right but credit should be given for accounts payable. In order to rectify the error Accounts receivable should be debited and accounts payable should be credited.
4) The right entry should be Carriage outwards debit and Cash should be credited. (Payables should be credited if cash is not paid for carriage outward)
5) The right entry is Sales returns debit and credit accounts receivable. Sales returns are contra account which is deducted from sales to show net sales.
6) The cost of goods sold is determined based on the inventory valuation method. It can be FIFO, LIFO, average cost method or specific identification method. In FIFO method , inventory is issued based on first purchase of lots, in LIFO method inventory is issued based on latest purchase of lots, average cost method uses average cost of inventory after each transaction. Specific identification method uses lot price of specific inventory sold.
7) Net profit is computed by deducting operating expenses from the gross profits of the firm
8) The closing merchandise inventory is shown as asset in the current assets of the Balance Sheet. The cost of goods sold is recorded in the expenses section of the income statement
9) Physical count of inventory is important irrespective of accounting system following by the firm. Inventory items are high value items and in order to ensure there is good internal control system it should be physically verified.
10) The company should segregate the duties of inventory management with different employees as part of internal control implementation in the firm.
