Determination of appropriate inventory flow method

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Reference no: EM13845909

Merchandising:

Objectives: Demonstrate application of Concepts pertaining to a Merchandising Company including the following:

  • Determination of appropriate inventory flow method for Perpetual System
  • Journalization and Posting to T accounts of Daily transactions
  • Maintenance of Perpetual Inventory Balances
  • Calculation of Cost of Goods Sold
  • Determination of Gross Profit
  • Calculation of Gross Profit for a Periodic Inventory System

Hannah's Handbags (HH) is a company that purchases purses from the manufacturer, Prouda, and sells them to a specialty boutique, Swanky Sacks (SS) that caters to its clients.   HH has hired you to be the accountant for the company.

PART 1:

Hannah's Handbags is concerned about impressing its investors and has asked you to explain which inventory flow system would be the best one to use that would maximize net profits.  Based upon this request, which one would you recommend?  Support your position by explaining the differences between the inventory flow systems and why your choice would be most appropriate.

PART 2:

Hannah's Handbags 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 the month of March:

  • Journalize the transactions
  • Post the transactions to T accounts
  • Maintain the perpetual inventory
  • Calculate the Gross Profit for the month of March.

PART 3:

Hannah's Handbags 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 period, determine the Gross Profit for that period using the LIFO inventory flow method. 

PART 2: Perpetual Inventory DATA for the month of MARCH

1. 3/1  HH purchased 30 navy blue shoulder bags on account from Prouda for $25 each.  Terms FOB-D ,  2/10,n/30.  Shipping costs = $20

2. 3/4  HH purchased 18 red clutch purses on account from Prouda for $10 each.  Terms FOB-SP,  2/10, n/eom.  Shipping costs = $12

3. 3/5  HH notifies Prouda that 8 of the navy blue shoulder bags were black.  After negotiation, Prouda agreed to reduce the cost of those bags to $20 each if HH kept them.  HH decided to keep the black bags.

4. 3/ 8 HH paid for the purchase on March 1. 

5. 3/10 HH purchased 15 black shoulder bags on account from Prouda for $28 each.  Terms FOB-SP, 2/10, n/30.  Shipping costs = $5

6. 3/11 HH sells 4 black shoulder bags to SS on account for $50 each.  Terms FOB-SP, 1/10,n/30.  Shipping costs = $8

7. 3/12 HH notifies Prouda that 9 of the black shoulder bags purchased on March 10 were navy blue.  HH makes a deal with Prouda to reduce the cost of these by $8 each and keeps them.

8. 3/14 HH sells 24 navy blue shoulder bags to SS on account for  $56 each.  Terms FOB-D  1/10, n/EOM.  Shipping costs = $30

9. 3/16 HH purchases 8 navy blue shoulder bags on account from Prouda for $29 each.  Terms FOB-SP, 2/10, n/30.  Shipping costs = $6

10. 3/17 HH pays for the purchase on March 4th.

11. 3/19 paid for purchase on March 10th

12. 3/20 Swanky Sacks paid for purchase on March 11th

13. 3/22 HH sells 9 Black shoulder bags to SS on account for $55 each.  Terms FOB-SP n/EOM  Shipping costs = $16

14. 3/23 Swanky Sacks paid for purchase on March 14th.

15. 3/26 Swanky Sacks notifies Hannah's that 3 of the bags purchased on March 22 were red clutch purses.  HH negotiates an allowance of $10 per red bag if Swanky will keep them.  Swanky agrees to the deal and keeps the red bags. 

16. 3/28 HH purchases 25 Black Shoulder Bags on account from Prouda for $30 each.  Terms FOB-D, 3/10, n/30.  Shipping costs $40

17. 3/28 HH sells 12 Navy Blue Shoulder Bags to SS on account for $62 each.  Terms FOB-D,  2/10, n/30.  Shipping costs $18.

18. 3/30 Swanky Sacks pays for the purchase on March 22. 

19. 3/31 HH pays Prouda in full. 

Part 3:  Periodic Inventory Data

Hannah's Handbags used the Periodic Inventory System prior to changing to a Perpetual System in March.   Hannah's Handbags used the LIFO flow method.   Hannah's Handbags performs a physical inventory on the last day of every month.   All discounts were taken on time. 

Using the following data, determine the Gross Profit for Hannah's Handbags during the month of February.  

Hannah's Handbags sold Red Clutch Purses for $25 each

Hannah's Handbags sold Navy Blue Shoulder Bags for $55 each

Hannah's Handbags sold Black Shoulder Bags for $50 each

On February 28th Hannah's Handbags sold out its inventory at half price because the company was moving to a new location and changing its inventory system. 

January 31st Inventory Balance:

Red Clutch Purses                            3 @ $7.50

Navy Blue Shoulder Bags              6  @ $23.25

Black Shoulder Bags                        8  @  $24.75

February 3          Purchase             10 Navy Blue @ $25  Terms: FOB-SP.  2/10, n/30 Shipping Costs = $12

February 8          Purchase             8 Black @ $26  Terms: FOB-SP.  2/10, n/30 Shipping Costs = $6

February 10        Purchase             5 Red @ $8   Terms: FOB-SP.  2/10, n/30 Shipping Costs = $2

February 15        Purchase             6 Black @ $27  Terms: FOB-D.  2/10, n/30 Shipping Costs = 4                         

February 21        Purchase             5 Navy Blue @ $25.50 Terms:  FOB-SP.  n/EOM  Shipping Costs $2

February 23        Purchase             1 Red @ $8.75  Terms: FOB-D  2/10, n/30 Shipping Costs = $1

February 27 Inventory Balance

Red Clutch Purses                            1

Navy Blue Shoulder Bags              4

Black Shoulder Bags                        9

February 28 Closing Inventory   0

Reference no: EM13845909

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