Case study - perpetual stock

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Accounting - Case study - perpetual stock

Case study - perpetual stock

Hayley Badge has recently converted from using the physical stock method
to the perpetual stock approach. When asked why by her friends Hayley was
at a loss to explain, other than that she no longer has to spend one Sunday
each month counting stock in her licensed grocery. This will help 'free up'
her social life.

The introduction of a new computer system has helped minimise the time
spent recording daily transactions. Hayley has been unsure of a number of
transactions and they have not 'gone through' the system. For instance,
some of her stock has been used for wine tastings as part of her new
marketing program. Hayley has also taken wine home for her personal use and
she donated two bottles of her favourite wine to a local charity. Old
habits die hard and at the end of the accounting period of one month Hayley
carried out a physical stock take on her favourite wine. Allowing for the
transactions above she is sure that there are three bottles less than
expected in her stock card.

The particular wine has experienced a fall in selling price as new,
fruitier wines have come onto the market. Hayley bought the 'Tabletop'
brand for $8 per bottle plus $1 per bottle licence fee. It now sells for
$7.00 per bottle, including the licence fee of $1.50.

Hayley has heard about the 'lower of cost and net realisable value [1] on
an item by item rule' from a friend and wonders if it applies in this
situation.

She also has a number of questions that she seeks to ask you regarding
other aspects of stock control.

Hayley provides you with a partly completed stock card along with some
diary entries. You are required to complete the stock card.

Diary entries relating to 'Tabletop' wines.

* 6 bottles used for wine tastings

* 2 bottles donated to charity

* 4 bottles used for personal imbibing

* 3 bottles 'missing'

The diary entries are to be recorded on 30 November.

It may be assumed that the 'lower of cost and net realisable value [2]
(NRV) rule on an item by item basis' will apply. You are to record this
event in the stock card.

Hayley would also like the details contained in the stock card to be
recorded in the 'stock control account'.

Hayley asks a series of questions regarding stock management:

Hayley is unsure whether to use FIFO [3]or identified cost in valuing
stock. Answer the following questions.

* explain what each of these terms mean

* provide two advantages of using FIFO

* provide two advantages of using identified cost

Hayley provides you with a list of transactions for December and asks you
to prepare separate stock cards using each method. It is important that you
have the correct balance from the stock card for the month of November.

3 Dec.
20 bottles of 'Tabletop' bought for $8, Invoice 890

6
6 bottles sold (cost $7) Invoice 091

9
10 bottles sold (cost $8) Invoice 092

14
2 bottles returned in (cost $8) Credit note 033

22
Drawings 3 bottles (cost $7)

27
Donations 2 bottles (cost $8)

General journal entries for above transactions and other possibilities:

Advertising
54

Stock control

54

WINE TASTINGS

Donations
18

Stock control

18

2 BOTTLES DONATED TO CHARITY

Drawings
36

Stock control

36

STOCK WITHDRAWN FOR PERSONAL USE

Stock loss
27

Stock control

27

STOCK REVEALED MISSING BY PHYSICAL STOCK TAKE

Stock write down
22

Stock control

22

STOCK WRITE DOWN

Stock control
xxx

Capital

xxx

OWNER CONTRIBUTES STOCK TO THE BUSINESS

View the text document for solution to November and December Stock card
entries.

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Links:
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[1] http://alison.com/#
[2] http://alison.com/#
[3] http://alison.com/#