1. BKAF 2043 FINANCIAL AND REPORTING 1- Assignment 4: Inventory
QUESTION 1
Fokadu Sdn Bhd is a company located in Kampung Bukit, Alor Setar. The transactions for
Fokadu Sdn Bhd for the year 2012 in relation to product X are as follow:
Date Transaction
20 January Purchased 3,000 units of product X with a price of RM2,400,000.
19 February Sold 2,800 units of product X on account free on BOD shipping point to
VB Enterprise.
25 March Purchased 2,000 units of product X with a cost of RM950 per unit.
20 April Sold 2,000 units of product X to Kakala Sdn Bhd and the transaction was
made in cash with the price of RM1,600 per unit.
28 April Due to wrong specification, 80 units of product sold on 20 April 2012
were returned to customer.
25 August Purchased another 1,500 units of product X with overall cost of
RM1,425,000
1 September 100 units of product X that were bought in 25 August 2012 were returned
to supplier due to wrong specification.
20 November Purchased 2,000 units of product X with a total purchase cost of
RM2,000,000.
17 December Sold for credit 3,500 units of product X to ReadyGo Enterprise with a
selling price of RM1,250 per unit.
Additional information:
1. As at 31 December 2011, the company’s inventory showed an ending balance of
2,000 units at the cost of RM1,000 per unit.
2. Other expenses for the year 2011 were RM1,500,000,
3. Assuming the tax for the year 2012 is 28%.
REQUIRED:
(a) Calculate the amount of ending inventory as at 31 December 2012 using the method of:
(i) First in first out (FIFO)
(ii) Weighted average cost method
(b) Prepare the Income Statement for the Year 2012 by referring to both FIFO and weighted
average cost method effects.
(c) Assuming that you are an accountant of Fokadu Sdn Bhd. If you have been given a
chance to choose between the two method, which one you prefer and why?
2. QUESTION 2
On 1 January 2006, Hardini Berhad signed an agreement with Strawberry Ltd, an overseas
company to act as sales agent. The terms of the agency are as follows:
Strawberry Ltd pays 10% commission on all sales made by Hardini and Hardini is to remit
90% of the proceeds to Strawberry immediately after receive the payment.
Strawberry shipped RM5 million worth of sales during the financial year to 30 June 2006 and
had made a consistent profit of 5% of the selling price. To date Hardini has sold
merchandised goods valued at RM2 million and has included the RM2 million in its sales as
at 30 June 2006. The unsold balance was taken up as closing inventory as at 30 June 2006.
REQUIRED:
(a) Discuss on the accounting treatment of the above transaction.
(b) Assuming that Strawberry’s only sale is to Hardini and it had opening inventory of
RM1,450,000 and also its amount of purchase during the financial year was
RM5,500,000. Estimate the closing inventory of Strawberry as at 30 June 2006.
(c) State the components that made up to the cost of inventory.
QUESTION 3
The December 31, 2010 inventory of Geruda Enterprise consisted of four products, for which
certain information is provided below.
Expected Estimated
Product Original Cost (RM) Selling Price(RM) Cost to sell(RM)
A 25 40 10
B 42 58 20
C 120 150 40
D 18 26 5
REQUIRED:
Using the lower-of-cost-or-net realizable value approach applied on an individual-item basis,
compute the inventory valuation that should be reported for each product on December 31,
2010.
3. QUESTION 4
Presented below is information related to Kuchinsky Company.
Cost RM Retail RM
Beginning inventory 280,000 390,000
Purchases 1,820,000 3,000,000
Markups 130,000
Markup cancellations 20,000
Markdowns 47,000
Markdown cancellations 7,000
Sales 3,150,000
REQUIRED:
Compute the inventory by the conventional retail inventory method.
4. SUGGESTED SOLUTION
QUESTION 1
(a) Will discuss in class
(b) (i) FIFO effect
Fokadu Sendirian Berhad
Income Statement For The Year Ended
31 December 2005
Sales 11,647,000
Total revenue 11,647,000
Expense:
Cost of goods sold (7,459,000)
Other expenses (1,500,000)
Total expenses 8,959,000
Profit before tax 2,688,000
Income tax expense (28%) 752,640
Net profit 1,935,360
(c) (ii) Weighted average effect
Fokadu Sendirian Berhad
Income Statement For The Year Ended
31 December 2005
Sales 11,647,000
Total revenue 11,647,000
Expense:
Cost of goods sold (7,552,674)
Other expenses (1,500,000)
Total expenses (9,052,674)
Profit before tax 2,594,326
Income tax expense (28%) 726,411
Net profit 1,867,915
c) Prefer FIFO method to show higher profit or weighted average cost with intention to pay
less tax.
5. QUESTION 2 (This question has been deleted)
(a) In this case, the inventory kept by Hardini is consignment goods. Hardini should not
include the RM2 million as sales since the only revenue that Hardini received was the
10% commission. Therefore, Hardini should reversed the sales of R2 million from its
sales account.
The unsold balance that was included in the Hardini’s closing inventory is actually
Strawberry Ltd’s inventory. Therefore, it should be deducted from Hardini’s closing
inventory because consignment goods are not consignee’s inventory.
(b) Cost of goods sold = Opening inventory + Purchases – Closing inventory
Cost of good sold:
Sales 100%
(-) COGS ? ...... 95%
Gross profit 5%
Therefore, cost of goods sold = 95% × RM2,000,000
= RM1,9000,000
1,900,000 = 1,450,000 + 5,500,000 – Closing inventory
Closing inventory = 5,050,000
(c) Cost of inventory includes:
1. Costs of purchase (include import duties, taxes, transport, handling & discounts)
2. Costs of conversion – direct labour & overheads
3. Other costs – incurred in bringing inventories to present location and condition
QUESTION 3
Lower-of-
Net Real. Cost-or-
Product Value (RM) Cost (RM) NRV (RM)
A 30 25 25
B 38 42 38
C 110 120 110
D 21 18 18