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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 on
an item by item rule' from a friend and wonders if it applies in this
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
(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:
explain the meaning of the terms 'cost' and 'net realisable value'.
what is the effect of a stock write down on the Profit and Loss statement and the balance sheet using the example above?
explain what acounting principle would be breached by failure to adopt the 'lower of cost and net realisable value rule'.
in relation to this rule what is meant by the phrase 'on an item by item basis'?
how is a stock write down recorded in the General journal?
describe two ways the stock card may assist management decision making
explian two advantages of Hayley carrying out a physical stock take on 30 November when using the perpetual system.
Hayley has introduced computers to her business. Identify two advantages of a computer-based system of maintaining stock cards.
state two advantages of using perpetual stock.
state two advantages of using physical stock.
Hayley is concerned about 'stock loss' in her business.
- give four reasons why stock loss may occur.
- give two reasons as to how stock gain may occur.
Hayley is unsure whether to use FIFO 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.
20 bottles of 'Tabletop' bought for $8, Invoice 890
6 bottles sold (cost $7) Invoice 091
10 bottles sold (cost $8) Invoice 092
2 bottles returned in (cost $8) Credit note 033
Drawings 3 bottles (cost $7)
Donations 2 bottles (cost $8)
General journal entries for above transactions and other possibilities:
2 BOTTLES DONATED TO CHARITY
STOCK WITHDRAWN FOR PERSONAL USE
STOCK REVEALED MISSING BY PHYSICAL STOCK TAKE
Stock write down
STOCK WRITE DOWN
OWNER CONTRIBUTES STOCK TO THE BUSINESS
View the text document for solution to November and December Stock card
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