accounting-Ali Naeem was recently placed in charge of inventory accounting for Sialkot Surgical Supply

Ali Naeem was recently placed in charge of inventory accounting
for Sialkot Surgical Supply. This
company is located in Pakistan and deals in surgical supplies for global
export. The company has been using the
last-in, first-out inventory method applied on a perpetual basis. The company’s export trade is denominated
and settled in dollars, and that currency is used within the company’s
ledger.

Ali’s responsibility is to bring Sialkot Surgical’s inventory
accounting into conformity with international accounting standards that have
been embraced by the Institute of Chartered Accountants of Pakistan. As a result of his research, Ali was
surprised to learn that LIFO does not have global acceptance and it is not a
GAAP method in his country.

Below is January’s preliminary inventory schedule for surgical
clamps. This schedule was prepared on
a LIFO basis.

Date

Purchases

Sales

Cost of Goods Sold

Balance

1-Jan

5,000 X $20 = $100,000

5-Jan

5,000 X $20 = $100,000

7,000 X $21 = $147,000

7,000 X $21 = $147,000

$247,000

#####

9,000 @ $35 = $315,000

7,000 X $21 = $147,000

2,000 X $20 = $ 40,000

3,000 X $20 = $ 60,000

$187,000

#####

3,000 X $20 = $ 60,000

4,000 X $22 = $ 88,000

4,000 X $22 = $ 88,000

$148,000

#####

3,000 @ $37 = $111,000

3,000 X $22 = $66,000

3,000 X $20 = $ 60,000

1,000 X $22 = $ 22,000

$ 82,000

#####

3,000 X $20 = $ 60,000

1,000 X $22 = $ 22,000

$ 82,000

(a)
Examine Sialkot’s LIFO
inventory schedule, and redo the presentation assuming perpetual FIFO. For this problem, you may assume that the
beginning inventory would be the same as under LIFO.

(b)
Examine Sialkot’s LIFO
inventory schedule, and redo the presentation assuming a moving average
method. For this problem, you may
assume that the beginning inventory would be the same as under LIFO.

(c)
Prepare journal
entries necessary to reflect the FIFO perpetual application.

(d)
Show that the
Inventory account balance resulting from part (c) agrees with the schedule
from part (a). If Ali applied FIFO on
a periodic basis, rather than a perpetual basis, would the same results
occur?

(e)
By applying FIFO,
rather than LIFO, will Sialkot Surgical’s income be increased or
decreased?

(f)
Do you suspect that
global divergence in accounting practices can contribute to difficulties in
cross-border financing and global trade?

(a) FIFO perpetual:

Date

Purchases

Sales

Cost of Goods Sold

Balance

1-Jan

5,000 X $20 = $100,000

5-Jan

7,000 X $21 = $147,000

#####

9,000 @ $35 =
$315,000

#####

4,000 X $22 = $ 88,000

#####

3,000 @ $37 =
$111,000

#####

(b) Moving average:

Date

Purchases

Sales

Cost of Goods Sold

Balance

1-Jan

5,000 X $20 = $100,000

5-Jan

7,000 X $21 = $147,000

#####

9,000 @ $35 = $315,000

#####

4,000 X $22 = $ 88,000

#####

3,000 @ $37 = $111,000

#####

(c)

GENERAL JOURNAL

Date
Accounts

Debit
Credit

7-Jan

Purchased
$147,000 of inventory on account (7,000 X $21)

12-Jan

Sold
merchandise on account (9,000 X $35)

12-Jan

To
record the cost of merchandise sold

17-Jan

Purchased
$88,000 of inventory on account (4,000 X $22)

26-Jan

Sold
merchandise on account (3,000 X $37)

26-Jan

To
record the cost of merchandise sold

(d)

(e)

(f)

 

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