Comprehensive Problem 2: Merchandising

This problem has a value of 10% of the final grade.

TsIzzWe (Ts) is a company that purchases T shirts from the manufacturer, Frootyluums (Frooty) and sells them to college students through the college bookstore, Rskoolstore (RSkool). Ts has hired you to be the accountant for the company.

PART 1:

Ts is concerned about paying taxes and has asked you to explain which inventory flow system would be the best one to use to minimize the taxes that are paid on the profits.

Based upon this request, which one would you recommend? Support your position by explaining the differences of the inventory flow systems.

I would recommend using the FIFO (First in First Out) inventory system for your company. This system will allow you to get what you have ordered first out first, in which, you will be able reduce items to clear them out of your stock to start selling the newer items. This way you will be able to get out your older inventory and not have any left over when the newer items become available.

LIFO (Last in First Out) would not work well here because the college students you sell the shirts to will get the same merchandise over and over again. They will be paying the same amount for the items no matter how old the items are. I do not see the students being happy with this and it can result in the school dropping you from their bookstore.

AVG Cost Method would work for your company because everything will cost the same. All your items will be evenly distributed in price. The only con I see here would be that the items would not be new all the time. Meaning you will have an inventory overflow every year and it will keep accumulating because you are not getting your older items out in time. Eventually, the students will still be paying the same price for shirts that they bought a year or more ago.

PART 2:

Ts has decided to follow your advice and use the inventory flow method that you recommended with its perpetual inventory system. Using the data provided for transactions that occurred during August, determine the Gross Profit at the end of the period.

PART 3:

Ts had used the periodic inventory system prior to switching to the perpetual inventory system. Using the data provided for transactions that occurred during that time, determine the Gross Profit for that period using the Average Cost Inventory Flow Method.

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Comprehensive Problem 2 – PART 3: Periodic Data

Ts performed a manual count on May 31st. Ts used the Periodic Average Cost Inventory Method

Using the following data, determine the Gross Profit for Ts during the month of May.

During the month of May,

Ts sold Long Sleeve Blue Shirts for \$7.50

Ts sold Short Sleeve Blue Shirts for \$6.50

May 1: Inventory Balance: Long Sleeve (LS)Blue Shirts:

180 @ \$3

Inventory Balance: Short Sleeve (SS) Blue Shirts: 55 @ \$2

May 5 Purchase: 40 LS Blue @ 3.50

May 5 Purchase: 25 SS Blue @ 2.25

May 9 Purchase: 100 LS Blue @ 3.70

May 13 Purchase: 300 SS Blue @ 2.40

May 15 Purchase: 200 SS Blue @ 2.42

May 20 Purchase: 50 SS Blue @ 2.45

May 24 Purchase: 144 SS Blue @ 2.50

May 27 Purchase: 300 SS Blue @ 2.52

May 30 Purchase: 250 LS Blue @ 4.00

May 30: Inventory Balance: Long Sleeve Blue Shirts: 195

Inventory Balance: Short Sleeve Blue Shirts: 124

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Comprehensive Problem 2 – PART 2: Perpetual Data

1. 8/6 Ts purchased 200 long sleeve blue shirts on account from Frooty for \$3 each. Terms FOB-SP 2/10, n30 Shipping costs = \$40

2. 8/8 Ts purchased 500 short sleeve blue shirts on account from Frooty for \$2.50 each. Terms FOB-D 2/15, n30 Shipping costs = \$50

3. 8/10 Ts notified Frooty that 50 of the long sleeve shirts were purple. After negotiation, Frooty agreed to reduce the price of those shirts to \$2 each. Ts agreed to keep the shirts.

4. 8/11 Ts purchased 400 long sleeve blue shirts on account from Frooty for \$3.50 each. Terms FOB-D n/eom Shipping costs = \$40

5. 8/12 Ts sold 290 long sleeve blue shirts to RSkool on account for \$8 each. Terms FOB-SP 1/10, n30 Shipping costs = \$30

6. 8/14 Ts paid for the purchase on the 6th.

7. 8/16 Ts sold 20 long sleeve purple shirts to RSkool on account for \$5 each. Terms FOB-D 2/10, n/eom Shipping costs = \$5

8. 8/18 Ts paid for the short sleeve shirts

9. 8/20 Ts sold 380 short sleeve shirts to RSkool on account for \$7 each. Terms FOB-SP n/eom Shipping costs = \$38

10. 8/21 Ts received payment from RSkool for the long sleeve blue shirts

11. 8/22 RSkool returned 100 of the short sleeve shirts because they were too small.

12. 8/24 Ts sold 200 long sleeve blue shirts to RSkool on account for \$8 each. Terms FOB-D 3/5, n/30 Shipping costs = \$30

13. 8/29 Ts received payment from RSkool for the purchase on the 24th

14. 8/30 Ts received payment from RSkool for the purple shirts.

15. 8/31 Ts received payment from RSkool for the purchase on the 20th

16. 8/31 Ts paid for the purchase on the 11th.

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