Week Four: Accounting for Retailing (Inventory) & GST

Required reading: Chapter 4 Sections 4.1 – 4.4 (190-205), Sections 4.6 – 4.7 (208-215)
Chapter 5: Sections 5.1 – 2.4 (234-242), S. 5.7 (250-251), S. 5.11 (257-262)
PRE-WORKSHOP Chapter 4 and 5 Number
QUESTIONS
Questions 4.1; 4.5; 4.10; 5.4; 5.8
Brief Exercises BE4.5; BE5.2; BE5.4
Exercises E4.1; E4.4; E4.5 (Assume
10%GST); E5.3; E5.5; PSA5.12
(amounts include GST)
WORKSHOP Problems PSA5.7 (only parts a & b)

Questions
4.1 (a) ‘The steps in the accounting cycle for a merchandising business are
different from the steps in the accounting cycle for a service business.’ Do
you agree or disagree?
(b) Is the measurement of profit in a merchandising business conceptually the
same as in a service business? Explain.
(a) Disagree. The steps in the accounting cycle are the same for both a
merchandising company and a service enterprise.
(b) The measurement of profit is conceptually the same. In both types of companies,
profit (or loss) is determined by subtracting expenses from revenues.

4.5 (a) What is a primary source document for recording (1) cash sales and (2)
credit sales?
(b) Using XXs for amounts, give the journal entry for each of the transactions
in part (a).

(a) The primary source documents are:

(1) cash sales — cash register tapes
(2) credit sales — sales invoices.

(b) The entries for the perpetual method of accounting for inventories are:

Debit Credit

Cash sales — Cash xx

Sales xx
Cost of sales xx
Inventory xx

Credit sales — Accounts Receivable xx

Sales xx
Cost of sales xx
Inventory xx
4.10. Which of the following statements relating to GST is true? Give reasons for your answers.
(a) The first purchaser bears the cost of the GST.
(b) GST is not a tax on business income.
(a) False. GST may be paid on taxable supplies at each stage in the commercial chain;
however, it is the final consumer, not the first purchaser, who bears the cost of the GST.
(b) True. The GST is a value-added tax, which means that tax is levied on the value added
by a business at each stage in the production and distribution chain. The GST is not a
tax on business income.

5.4. What is the main basis of accounting for inventories? What is the major objective in
accounting for inventories?
The primary basis of accounting for inventories is cost in accordance with the cost
principle. The major objective for inventories is the proper determination of profit in
accordance with the matching principle.

5.8. Keryn Kimberly is studying for the next accounting examination. What should
Keryn know about (a) departing from the cost basis of accounting for inventories
and (b) the meaning of net realisable value in relation to accounting for inventories?
Keryn should know the following:
(a) A departure from the cost basis of accounting for inventories is justified when the
value of the goods is no longer as great as its cost. The write-down to market
value should be recognised in the period in which the price decline occurs.
(b) IAS 2 defines net realisable value as the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to
make the sale (i.e. marketing, selling and distributing to customers).

Brief Exercises
BE4.5 Identify placement of items on a fully classified statement of profit or loss. (LO4)
Explain where each of these items would appear on a fully classified statement of profit
or loss: interest revenue, cost of sales, depreciation expense, sales returns and
allowances, purchase returns and allowances, discount received, and discount allowed.
These items and where they would appear in a fully classified statement of profit or loss are
listed below:
Item Section

Interest revenue Revenue or other income (below gross profit) it depends on the
type of business
Cost of sales Cost of sales
Depreciation expense Operating expenses. Depreciation expenses could be further
classified either as an administrative expense (e.g. depreciation
 of office equipment) or a selling expense (e.g. depreciation of
store or warehouse equipment).
Sales returns and allowances Sales revenue.
Purchase returns and Under the periodic inventory system, purchase returns and
allowances allowances appears in the statement of profit or loss in the
calculation of cost of sales as part of the determination of gross
profit.
Under the perpetual inventory system, purchase returns and
allowances are recorded as a decrease in inventory and
therefore do not appear on the statement of profit or loss
Discount received Other income
Discount allowed Financial expenses

BE5.2 Calculate cost of sales and gross profit. (LO2)

Assume that Jess Ltd uses a periodic inventory system and has the following account
balances: Beginning inventory $45 000, Ending inventory $67 500, Sales $472 500,
Purchases $300 000, Purchase returns $14 250, and Freight-in $12 000. Determine the
amounts to be reported for cost of net purchases, cost of sales and gross profit.
Jess Ltd
OPERATING REVENUE
Sales revenue:
Gross sales revenue 472, 500
Less: Sales returns and allowances –
Net sales revenue 472,500
Cost of sales:
Beginning inventory 45,000
Purchases 300,000
Less: Purchase returns and allowances (14, 250)
Net purchases 285,750
Add: Freight-in 12,000
Cost of goods purchased 297,750
Cost of goods available for sale 342,750
Less: Ending inventory (67,500)
Cost of sales 272,250
GROSS PROFIT 197,250

BE5.4 Determine the lower of cost and net realisable value basis of accounting for inventories. (LO7)
Olynda Garden Centre accumulates the following data at 30 June:

Calculate the lower of cost and net realisable value for Olynda’s total inventory.

Olynda Garden Centre

 Inventory Categories Cost NRV LCNRV
Native trees $16,800 $14,280 $14,280
Potting mix 12,600 13,300 12,600
Garden statues 19,600 17,920 17,920
Total valuation $49,000 $45,500 $44,800

The lower of cost and net realisable value (LCNRV) is $44,800

Exercises
E4.1 Journalise sales transactions. (LO3)

The following transactions are for Unique Artworks Ltd.

1. On 7 December Unique Artworks Ltd sold $792 000 of inventory to Cambridge

Collectables Ltd, terms 2/7, n/30. The cost of the inventory sold was $528 000.

2. On 8 December Cambridge Collectables Ltd was granted an allowance of $33 000 for
inventory purchased on 7 December.

3. On 13 December Unique Artworks Ltd received the balance due from Cambridge
Collectables Ltd.

Required

(a) Prepare the journal entries to record these transactions in the records of Unique
Artworks Ltd.

(b) Assume that Unique Artworks Ltd received the balance due from Cambridge
Collectables Ltd on 2 January of the following year instead of 13 December.
Prepare the journal entry to record the receipt of payment on 2 January.

(c) What are the advantages and disadvantages associated with granting a discount
for early payment?

Unique Artworks Ltd

(a) (1) 7 Dec Accounts Receivable 792,000
Sales 792,000
Cost of sales 528,000
Inventory 528,000

(2) 8 Dec Sales Returns and Allowances 33,000

Accounts Receivable 33,000

(3) 13 Dec Cash ($759,000 – $15,180) 743,820

Discount Allowed [($792,000 – $33,000) x 2%] 15,180
Accounts Receivable ($792,000 – $33,000) 759,000

(b) 2 Jan Cash 759,000

Accounts Receivable ($792,000 – $33,000) 759,000

(c) The advantages associated with granting a discount for early payment are that the
purchaser saves money and the seller is able to shorten the operating cycle thereby
improving cash flow by converting accounts receivable to cash earlier.
 The disadvantage to the seller is that there is a cost associated with offering a discount.

E4.4 Journalise perpetual inventory entries. (LO2, 3)

On 1 September Cambell’s Office Supplies had an inventory of 30 deluxe pocket calculators at a cost of
$22 each. The business uses a perpetual inventory system. During September these transactions
occurred:

Required

Journalise the September transactions.

Cambells Office Supplies

6 Sept. Inventory (80 x $22) 1,760
Cash 1,760

9 Sept. Freight In 88
Cash 88

10 Sept. Accounts Receivable 44

Inventory 44

12 Sept. Accounts Receivable (26 x $33) 858

Sales 858
Cost of sales (26 x $22) 572
Inventory 572

14 Sept. Sales Returns and Allowances 33

Accounts Receivable 33

Inventory 22
Cost of sales 22

20 Sept. Accounts Receivable (30 x $33) 990

Sales 990
Cost of sales (30 x $22) 660
Inventory 660

E4.5 Journalise purchase transactions. (LO2)

The following information relates to Hampton Pty Ltd.
1. On 5 April purchased inventory from R. Ward & Co. for $9000, terms 2/7, n/30.
2. On 6 April paid freight costs to Freight Masters of $450 on inventories purchased from R. Ward &
Co.
3. On 7 April purchased equipment on account for $52 000.
4. On 8 April returned incorrect inventories to R. Ward & Co. and was granted a $1500 allowance.
5. On 11 April paid the amount due to R. Ward & Co.
Required
(a) Prepare the journal entries to record the transactions listed in the records of Hampton Pty Ltd.
(b) Assume that Hampton Pty Ltd paid the balance due to R. Ward & Co. on 4 May instead of 11
April. Prepare the journal entry to record this payment.

Without GST

Hampton Pty Ltd

(a) (1) 5 April Inventory 9,000

Accounts Payable 9,000

(2) 6 April Freight In 450

Cash 450

(3) 7 April Equipment 52,000

Accounts Payable 52,000

(4) 8 April Accounts Payable 1,500

Inventory 1,500

(5) 11 April Accounts Payable 7,500

($9,000 – $1500)
Discount Received 150
[($9,000 – $1500) x 2%]
Cash ($7,500 – $150) 7,350

(b) 4 May Accounts Payable ($9,000 – $1,500) 7,500

Cash 7,500

With GST

Hampton Pty Ltd

(a) (1) 5 April Inventory 9,000

GST Paid 900
Accounts Payable 9,900

(2) 6 April Freight In 450

GST Paid 45
Cash 495

(3) 7 April Equipment 52,000

GST Paid 5,200
Accounts Payable 57,200
 (4) 8 April Accounts Payable 1,650
GST Paid 150
Inventory 1,500

(5) 11 April Accounts Payable 8,250

($9,900 – $1,650)
Discount Received 150
[($9,900 – $1,650) x 2%]
GST Paid 15
Cash ($8,250 – $165) 8,085

(b) 4 May Accounts Payable ($9,900 – $1,650) 8,250

Cash 8,250

E5.3 Prepare cost of sales section. (LO2)

Below is a series of cost of sales sections for companies X, F, L and S.

Required

(a) Fill in the lettered blanks to complete the cost of sales sections.

(b) Explain the purpose of this exercise. (Hint: What is the main skill you have been developing?)

(a) $1,460 ($1,500 – $40)

(b) $1,570 ($1,460 + $110)
(c) $1,510 ($1,820 – $310)
(d) $50 ($1,080 – $1,030)
(e) $200 ($1,230 – $1,030)
(f) $120 ($1,350 – $1,230)
(g) $7,500 ($290 + $7,210)
(h) $730 ($7,940 – $7,210)
(i) $8,940 ($1,000 + $7,940)
(j) $5,200 ($49,530 – $44,330 from (l))
(k) $1,500 ($43,590 – $42,090)
(l) $44,330 ($42,090 + $2,240)
(b) The purpose of this exercise is to develop the skill to determine the relationship between each
component in the calculation of cost of sales.

E5.5 Prepare a statement of profit or loss. (LO4)

Presented here is information related to Djuric Ltd for the month of January 2022.

Beginning inventory was $60 060, and ending inventory was $90 090.

Required

Prepare a fully classified statement of profit or loss for Djuric Ltd.

SurfsUp Ltd sells a snowboard, Xpert, that is popular with snowboard enthusiasts. Below is
information relating to SurfsUp’s purchases of Xpert snowboards during May. During the same month,
124 Xpert snowboards were sold. SurfsUp uses a periodic inventory system.

Djuric Ltd
Statement of Profit or Loss
for the month ended 31 January 2022

INCOME
Sales revenue:
Gross sales revenue $446,160
Less: Sales returns and allowances 18,590
Net sales revenue $427,570

Cost of sales:
Beginning inventory 1 January 60,060
Purchases $286,000
Less: Purchase returns and allowances 12,870
Net purchases 273,130
Add: Freight-in 14,300
Cost of goods purchased 287,430
Cost of goods available for sale 347,490
 Less: Ending Inventory 31 January 90,090
Cost of sales 257,400
GROSS PROFIT 170,170

OPERATING EXPENSES
Selling expenses:
Freight-out 10,010
Rent expense — store space 14,300
Sales salaries expense 30,030 54,340

Administrative expenses:
Insurance expense 17,160
Office salaries expense 57,200
Rent expense — office space 14,300 88,660

Financial expenses:
Discount allowed 11 440 11,440
Total operating expenses 154,440
PROFIT $15,730

PSA5.12 Journalise inventory entries under a perpetual inventory system with GST. (LO9)
On 1 September, Better Office Supplies had an inventory of 30 deluxe pocket calculators at
a cost of $10 each. The business uses a perpetual inventory system and FIFO inventory cost
flow method. During September, the following transactions occurred:

Required

Journalise the September transactions, assuming all businesses were registered for GST and the GST
rate was 10%.

Better Office Supplies

6 Sept. Inventory (80 x $10) 800
GST Paid 80
Cash 880
(Purchase 80 calculators @ $11)

9 Sept. Freight Inwards/Inventory 40

GST Paid 4
Cash 44
(Paid freight)
 10 Sept. Accounts Receivable (2 x $11) 22
Inventory (2 x $10) 20
GST Paid 2
(Returned 2 calculators — credit given)

12 Sept. Accounts Receivable (26 x $16.50) 429

Sales 390
GST Collected 39

Cost of Sales (26 x $10) 260

Inventory 260
(Sold 26 calculators)

14 Sept. Sales Returns and Allowances 15

GST Collected 1.50
Accounts Receivable 16.50

Inventory 10
Cost of Sales 10
(1 calculator was returned into stock)

20 Sept. Accounts Receivable (30 x $16.50) 495

Sales 450
GST Collected 45

Cost of Sales [(5 x $10) + (25 x $10)] * 300

Inventory 300
(Sold 30 calculators to Mega Ltd)
*Note: Better Office Supplies uses the FIFO inventory cost flow assumption, which means that inventory
purchased earlier will be sold first. On 1st September, Better Office Supplies had 30 calculators on stock
@ $10 each. The first 26 calculators were sold to Reader Book Store on 12th September, so there were
only 4 calculators left @ $10. But 1 Calculator was returned from Reader Book Store on 14 September.
So when Better Office Supplies sold 30 calculators to Mega Ltd on 20th September, 5 calculators from
old stock @ $10 each were sold first, and the remaining 25 calculators were taken from the new stock
purchased on 6th September also @ $10 each.

Workshop question
PSA5.7 Journalise, post and prepare trial balance and partial statement of profit or loss. (LO1, 2, 4)

At the beginning of the current season, the ledger of Kids Sportstore Ltd showed Cash $5250;
Inventory $3570; and Share Capital $8820. The following transactions were completed during October
2022.
The chart of accounts for Kids Sportstore Ltd includes Cash, Accounts receivable, Inventory, Accounts
payable, Share capital, Sales, Sales returns and allowances, Purchases, Purchase returns and
allowances, Discount received, and Freight-in.

Required

(a) Journalise the October transactions using a periodic inventory system.

(b) Using T accounts, enter the beginning balances in the ledger accounts and post the October
transactions.

(c) Prepare a trial balance as at 31 October 2022.

(d) Journalise the closing entries.

(e) Prepare a statement of profit or loss up to gross profit, assuming inventory on hand at 31
October is $3780.

Kids Sportstore Ltd

General Journal

(a)

Date Particulars Debit Credit

Oct. 4 Purchases 1,974

Accounts Payable 1,974
 6 Freight-in 84
Cash 84

8 Accounts Receivable 1,890

Sales 1,890

10 Accounts Payable 84
Purchase Returns and Allowances 84

11 Purchases 1,260
Cash 1,260

11 Accounts Payable ($1,974 – $84) 1,890

Discount Received ($1,890 x 3%) 57
Cash ($1,890 – $57) 1,833

14 Purchases 1,050
Accounts Payable 1,050

15 Cash 105
Purchase Returns and Allowances 105

17 Freight-in 63
Cash 63

18 Accounts Receivable 1,680

Sales 1,680

20 Cash 1,050
Accounts Receivable 1,050

20 Accounts Payable 1,050

Discount Received ($1,050 x 2%) 21
Cash 1,029
 Date Particulars Debit Credit

27 Sales Returns and Allowances 63

Accounts Receivable 63

30 Accounts Receivable 1,890

Sales 1,890

30 Cash 1,050
Accounts Receivable 1,050

(b)

Cash
1/10 Opening Balance 5,250 6/10 Freight-in 84
15/10 Purchase returns 105 11/10 Purchases 1,260
20/10 Accounts receivable 1,050 11/10 Accounts payable 1,833
30/10 Accounts receivable 1,050 17/10 Freight-in 63
20/10 Accounts payable 1,029
31/10 Closing Balance 3,186
7,455 7,455
1/11 Opening Balance 3,186

Accounts Receivable
8/10 Sales 1,890 20/10 Cash 1,050
18/10 Sales 1,680 27/10 Sales returns 63
30/10 Sales 1,890 30/10 Cash 1,050
31/10 Closing Balance 3,297
5,460 5,460
1/11 Opening Balance 3,297

Inventory
1/10 Opening Balance 3,570

Accounts Payable
10/10 Returns and allowances 84 4/10 Purchases 1,974
11/10 Discounts and cash 1,890 14/10 Purchases 1,050
20/10 Discounts and cash 1,050
3,024 3,024

Share Capital
1/10 Opening Balance 8,820

Sales
8/10 Accounts receivable 1,890
18/10 Accounts receivable 1,680
30/10 Accounts receivable 1,890
5,460

Sales Returns and Allowances

27/10 Accounts Receivable 63

Purchases
4/10 Account Payables 1,974
11/10 Cash 1,260
14/10 Accounts Payable 1,050
4,284

Purchase Returns and Allowances

10/10 Accounts Payable 84
15/10 Cash 105
189
 Discount Received
11/10 Accounts Payable 57
20/10 Accounts Payable 21
78

Freight-in
6/10 Cash 84
17/10 Cash 63
147

(c)

Kids Sportstore Pty Ltd

Trial Balance
as at 31 October 2022

Debit Credit

Cash $3,186
Accounts Receivable 3,297
Inventory 3,570
Accounts Payable $–
Share Capital 8,820
Sales 5,460
Sales Returns and Allowances 63
Purchases 4,284
Purchase Returns and Allowances 189
Discount Received 78
Freight-in 147
$14,547 $14,547

(d) Closing entries:

Profit or loss $8,064
summary

Beginning inventory $3,570

Sales returns and allowances 63

Purchases 4,284

Freight-in 147

(To close various debits amounts to the Profit or Loss Summary)

Ending inventory $3,780

Sales 5,460

Purchases returns and allowances 189

Discount received 78

Profit or loss summary $9,507

(To close various credit accounts to profit or loss summary)

(e)
Kids Sportstore Pty Ltd

Partial Statement of Profit or Loss

for the month ended 31 October 2022

Sales revenues:
Sales $5,460
Less: Sales returns and allowances (63)
Net sales revenue 5,397
Cost of sales:
 Beginning inventory 1 October 3,570
Purchases $4,284
Less: Purchase returns and allowances (189)
Net purchases 4,095
Add: Freight-in 147
Cost of goods purchased 4,242
Cost of goods available for sale 7,812
Ending inventory 31 October 3,780
Cost of sales 4,032
Gross profit $1,365

PSB5.7 Journalise, post and prepare trial balance and partial statement of profit or loss. (LO1, 2,
4)
At the beginning of the current season, the ledger of Mill Park Tennis Shop Pty Ltd showed Cash
$5000; Inventory $3400; and Share capital $8400. The following transactions were completed during
October 2022.

The chart of accounts for the tennis shop includes Cash, Accounts receivable, Inventory, Accounts
payable, Share capital, Sales, Sales returns and allowances, Purchases, Purchase returns and
allowances, Discount received, and Freight-in.

Required

(a) Journalise the October transactions using a periodic inventory system.

(b) Using T accounts, enter the beginning balances in the ledger accounts and post the October
transactions.
(c) Prepare a trial balance as at 31 October 2022.

(d) Journalise the closing entries.

(e) Prepare a statement of profit or loss up to gross profit, assuming inventory on hand at 31
October is $3600.

Mill Park Tennis Shop Pty Ltd

General Journal
(a)

Date Particulars Debit Credit

Oct. 4 Purchases 1,880

Accounts Payable 1,880
(Terms 3/7, n/30)

6 Freight-in 80
Cash 80

8 Accounts Receivable 1,800

Sales 1,800

10 Accounts Payable 80
Purchase Returns and Allowances 80

11 Purchases 1,200
Cash 1,200

11 Accounts Payable ($1,880 – $80) 1,800

Discount Received ($1,800 x 3%) 54
Cash ($1,800 – $54) 1,746

14 Purchases 1,000
Accounts Payable 1,000
(Terms 2/7, n/60)

15 Cash 100
Purchase Returns and Allowances 100

17 Freight-in 60
Cash 60

18 Accounts Receivable 1,600

Sales 1,600
20 Cash 1,000
Accounts Receivable 1,000
 20 Accounts Payable 1,000
Discount Received ($1,000 x 2%) 20
Cash 980
27 Sales Returns and Allowances 60
Accounts Receivable 60

30 Accounts Receivable 1,800

Sales 1,800

30 Cash 1,000
Accounts Receivable 1,000

(b)

Cash
1/10 Opening Balance 5,000 6/10 Freight-in 80
15/10 Purchase returns 100 11/10 Purchases 1,200
20/10 Accounts Receivable 1,000 11/10 Accounts 1,746
Payable
30/10 Accounts Receivable 1,000 17/10 Freight-in 60
20/10 Accounts 980
Payable
31/10 Closing Balance 3,034
7,100 7,100
1/11 Opening Balance 3,034

Accounts Receivable
8/10 Sales 1,800 20/10 Cash 1,000
18/10 Sales 1,600 27/10 Sales Returns 60
30/10 Sales 1,800 30/10 Cash 1,000
31/10 Closing Balance 3,140
5,200 5,200
1/11 Opening Balance 3,140

Inventory
1/10 Opening Balance 3,400

Accounts Payable
10/10 Purchase Returns 80 4/10 Purchases 1,880
11/10 Discounts Received & 1,800 14/10 Purchases 1,000
Cash
20/10 Discounts Received & 1,000
Cash
2,880 2,880

Share Capital
1/10 Opening 8,400
 Balance

Sales
8/10 Accounts 1,800
Receivable
18/10 Accounts 1,600
Receivable
30/10 Accounts 1,800
Receivable
5,200

Sales Returns and Allowances

27/10 Accounts Receivable 60

Purchases
4/10 Accounts Payable 1,880
11/10 Cash 1,200
14/10 Accounts Payable 1,000
4,080

Purchase Returns and Allowances

10/10 Accounts 80
Payable
15/10 Cash 100
180
Discount Received
11/10 Accounts 54
Payable
20/10 Accounts 20
Payable
74

Freight-in
6/10 Cash 80
17/10 Cash 60
140

(c)
Mill Park Tennis Shop Pty Ltd
Trial Balance
as at 31 October 2022
Debit Credit
Cash $3,034
Accounts Receivable 3,140
Inventory 3,400
Accounts Payable $-
 Share Capital 8,400
Sales 5,200
Sales Returns and Allowances 60
Purchases 4,080
Purchase Returns and Allowances 180
Discount Received 74
Freight-in 140
$13,854 $13,854

(d) Closing entries:

Profit or loss summary 7,680
Beginning inventory 3,400
Sales returns and allowances 60
Purchases 4,080
Freight inwards 140
(To close various debits amounts to the Profit or Loss Summary)

Ending inventory 3,600

Sales 5,200
Purchases returns and allowances 180
Discount received 74
Profit or loss summary 8,994
(To close various credit accounts to profit or loss summary)

(e)
Mill Park Tennis Shop Pty Ltd
Partial Statement of Profit or Loss
for the month ended 31 October 2022

Sales revenues:
Sales $5,200
Less: Sales returns and allowances (60)
Net sales revenue $5,140
Cost of sales:
Beginning inventory 1 October 3,400
Purchases $4,080
Less: Purchase returns and allowances (180)
Net purchases 3,900
Add: Freight-in 140
Cost of goods purchased 4,040
Cost of goods available for sale 7,440
Ending inventory 31 October 3,600
Cost of sales 3,840
Gross profit $1,300