Exercises Topic 5

5.1. Inventories and inventory systems.

This is an example to be solved using both methods, permanent and periodic inventory
system. Prepare the journal entries, general ledger, and income statement according to each
method.
Starts the month with inventories worth 1,500.-
1) Sells on credit to a customer for 400.- materials that had cost 250.-
2) Cash purchases materials for 550.-
3) Returns to a supplier products purchased for 60.-. The supplier deducts it from the
pending invoice.
4) Purchase materials on credit for 110.-
5) Makes a return to a supplier of stocks with a cost of 10.-.
6) Sells products for 1,200 in cash.- Its cost was 1,000.- when they were purchased.
7) A customer returns defective materials worth 100.- The cost of acquisition was 75.-
8) Inventories in stock at the end of the period are 900.-

1) Dr ------------------------------------------ to ----------------------------------------------- Cr
400 Accounts receivable Sales Revenue 400
250 Cost of goods sold Inventory 250
2) Dr ------------------------------------------ to ----------------------------------------------- Cr
550 Inventory Cash 550
3) Dr ------------------------------------------ to ----------------------------------------------- Cr
60 Accounts payable Inventory 60
4) Dr ------------------------------------------ to ----------------------------------------------- Cr
110 Inventory Accounts payable 400
5) Dr ------------------------------------------ to ----------------------------------------------- Cr
10 Accounts payable Inventory 10
6) Dr ------------------------------------------ to ----------------------------------------------- Cr
1,200 Cash Sales Revenue 1,200
1,000 COGS Inventory 1,000
7) Dr ------------------------------------------ to ----------------------------------------------- Cr
100 Sales returns Accounts receivable 100
75 Inventory COGS 75
9) Dr ------------------------------------------ to ----------------------------------------------- Cr
15 COGS Inventory 15

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INCOME STATEMENT:

SALES 1,600
- Sales return 100
NET SALES 1,500
- COST OF GOODS SOLD 1,190
GROSS MARGIN 310

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PERMANENT INVENTORY SYSTEM:
DAY 1:
400 Customers (i.e.,
receivable)
to Sales revenue 400
250 Cost of goods sold
Inventory 250

DAY 2:
550 Inventory
to Cash 550

DAY 3:
60 Supplier (i.e., payable)
to Inventory 60

DAY 4:
110 Inventory
Supplier 110

Day 5
10 Supplier
to Inventory 10

Day 6

1,200 Cash
to Sales revenue 1,200
1,000 Cost of goods sold
in Inventory 1,000

DAY 7:

100 Sales return

to Customers 100
75 Inventory
to Cost of goods sold 75

DAY 8:

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 15 Cost of goods sold
to Inventory 15

General ledger:

Inventory Cash / Banks

1,500 250 1) 6) 1,200 550 2)
2) 550 60 3)
4) 110 10 5)
7) 75 1,000 6)

15 8) Balance 660
Balance 900

Suppliers Customers Sales revenue

3) 60 110 4) 1) 400 100 7) 400 1)
5) 10 1,200 6)

Balance 40 Balance 300 Balance

1,600

Cost of goods sold Sales return

1) 250 75 7) 7) 100
6) 1,000
8) 15

Balance 1,190 Balance 100

You may also see for transaction 8) some books use “inventory difference” to record the inventory
shrinkage. It’s essentially an additional cost of goods sold that occurs as an expense

INCOME STATEMENT (perpetual inventory system):

Sales 1,600
Sales return (100)

NET SALES 1,500

Cost of goods sold (1,190)

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Gross margin 310

Profit 310

PERIODIC INVENTORY SYSTEM:

DAY 1:
400 Customers
Sales revenue 400

DAY 2:
550 Purchases
to Cash 550

DAY 3:
60 Suppliers
to Purchase return 60

DAY 4:
110 Purchases
to Suppliers 110

DAY 5:
10 Cash
to Purchase return 10

DAYS 6:
1,200 Cash
to Sales revenue 1,200

DAY 7:
100 Sales returns
to Customers 100

General Ledger:

Purchases Cash / banks Purchase returns

2) 550 5) 10 550 2) 60 3)
4) 110 6) 1,200 10 5)

5
 Balance 660 Balance 660 Balance 70

Suppliers Customers Sales revenue

60 3) 110 4) 400 1) 100 7) 400 1)
1,200 6)

Balance50 Balance 300

Balance1,600

Sales returns
100 7)

Balance 100

INCOME STATEMENT (periodic inventory system)

Sales revenue 1600

Sales returns (100).
_______
Net sales 1,500

Cost of goods sold: (1,190)

-Purchase 660
-Purchases returns (70)
-Inventory beginning balance 1,500
-Inventory ending balance (900)

Gross margin 310

Profit 310

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5.2. SINSIVEX SA.
Use the perpetual inventory system to make journal entries correspond to the following:
a) Purchase initial inventory worth 1,500 on credit payable to supplier
b) Purchase of goods on credit for 500, paying cash 50 for transportation.
c) Pay 100 to providers.
d) Sale on credit for 1,200, granting a discount of 50. The cost of the merchandise sold is
300.
e) Pay debts to suppliers of 700 and get 100 discount for rapid payment.
f) Purchase of stocks on credit for 200. When reviewing the purchase, the company
observes defects in the quality of the goods and half is returned to the supplier.
g) Sale of goods on credit for 1,000, the cost of goods was 250.
h) The previous customer returns half of the goods received for breach of the order
conditions.
The physical count of the merchandise at the end of the year was 1,200 and the causes of
the difference with the accounting count could not be detected.

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A:
1500 Inventory
to Suppliers 1500

B:
550 Inventory cash 50
to suppliers 500

C:
100 Suppliers
to Cash 100

D:
1,150 Customer
to Sales revenue 1,150

300 Cost of goods sold to Inventory 300

E:
700 Suppliers Cash 600
to Inventory 100

F:

200 Inventory
to Suppliers 200
100 suppliers
to Inventory 100

G:

1,000 Customers
to Sales revenue 1,000
250 Cost of goods sold
to Inventory 250
H

500 Sales returns

to customer 500
125 Inventory
Cost of goods sold 125

8
Period end count adjustment:

425 Cost of goods sold

to Inventory 425

9
Perpetual Inventory
System:
Sales revenue 2,150
Sales returns -500
Net sales 1,650

Cost of goods sold (900)

Gross Margin 750

Periodic Inventory
System:
Sales Revenue 2,150
Sales Returns -500
Net Sales 1,650

Purchases 700
Purchase Returns (100)
Beginning inventory 1,500
Ending inventory (1,200)

Net cost of goods sold (900)

Gross margin 750

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5.3. Quick checks
Calculate the missing data (in bold) in the table below:

Items Company 1 Company 2 Company

3
Sales 10,000 15,000 25,000
Beginning inventory 5,000 8,000 1,000
Purchases 3,000 2,000 20,000
Purchase returns 1,000 1,000 2,000
Inventory available for sale 7,000 9,000 19,000
Ending inventory 3,000 2,000 4,000
Cost of goods sold 4,000 7,000 15,000
gross profit 5,000 5,000 8,000
Sales returns 1,000 3,000 2,000

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5.4. INVENTORY SYSTEMS: ROCK, SA
The company ROCK, SA, begins its activity in the current year. During the first month you
(Rock) carry out the following transactions:

Day 1. You buy cash merchandise worth CU10,000. The costs for acquiring the goods not
included in the invoice amount are CU2,000. ROCK SA obtains a 10% discount on the
amount of the goods due to immediate payment after receiving the invoice.

Day 2. Buy goods on credit for CU15,000. These are goods with a close expiration date, so
they have a 5% discount on the amount of the goods.

Day 10. Sales to this date have been CU8,000, of which CU3,000 have been collected in
cash and the rest are pending collection. Cost of goods sold equals 3,500 CU.

Day 15. Purchase of goods for CU20,000 on credit.

Day 18. Returns CU3,000 worth of goods from the previous purchase for quality defects.

Day 28. Sales for the rest of the month are 35,000 CU, of which 15,000 CU have been
collected. The cost of goods sold is CU15,500.

Day 29. Total sales returns for the month are 9,500, at a cost of inventory of CU3,000.

Day 30. Send documentation to your customers indicating the granting of a "discount" of
5% of the total amount of sales.

Day 31. Suppliers carry out "discounts" to the company for a total of 1,500 CU.

The physical count of ending inventories is 27,100 CU.

Requirement:

Enter the previous transactions in General Journal and General Ledger format, using:
A) Permanent inventory system
B) Periodic inventory system.

DAY 1:
12,000 Purchase of goods Cash 11,000
to Purchase discounts (rapid 1,000
payement)

DAY 2:
14,250 Purchase of goods Accounts payable 14,250

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 to

DAY 10:
3,000 Cash Sales Revenue 8,000
5,0000 Accounts receivable to

DAY 15:
20,000 Purchase of goods
to Accounts payable 20,000

DAY 18:
3,000 Accounts payable Purchase returns 3,000
to

DAY 28:

15,000 Cash
to Sales Revenue 35,000
20,000 Accounts receivable

DAY 29:

9,500 Sales return

to Accounts payable 9,500
DAY 30:

1,675 Sales discount

to Accounts receivable 1,675

DAY 31:
1,500 Accounts payable
to Purchase discount 1,500

INCOME STATEMENT

GROSS SALES 43,000

- SALES RETURN (9,500)
- SALES DISCOUNT (1,675)
NET SALES 31,825

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(COGS) (13,650)

PURCHASES 46,250
- PURCHASE RETURNS (3,000)
- PURCHASE DISCOUNTS (1,500)
+ BEGINNING INVENTORY 0
- ENDING INVENTORY (27,100)
- DISCOUNT RAPID PAY (1,000)

GROSS MARGIN 18,175

INCOME STATEMENT (periodic inventory system)

Sales revenue 43,000

-Sales returns (9,500)
-Sales discount (1,675)
_______
Net sales 31,825

Cost of goods sold: (13,650)

Purchases 46,250
-Purchase returns (3,000)
-Purchase discount (1,500)
+Beginning inventory 0
-Ending inventory (27,100)
-Purchase discount rapid pay (1,000)

Permanent Inventory System:

DAY 1:
11,000 Inventories
to Cash / Banks 11,000

(10,000 + 2,000 = 12,000 - (10% s / 10,000) = 11,000

DAY 2:
14,250 Inventories

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 15,000*(1 -5%) = 14,250 to Suppliers 14,250

DAY 10:
5,000 Customers
3,000 Cash
to Sales revenue 8,000
3,500 Cost of goods sold
to Inventories 3,500

DAY 15:
20,000 Inventories
to Suppliers 20,000

DAY 18:
3,000 Suppliers
to Inventories 3,000

DAY 28:
15,000 Cash / Banks
20,000 Customers
to Sales revenue 35,000
15,500 Cost of goods sold
to Inventories 15,500

DAY 29:
9,500 Sales returns
to Customers 9,500
3,000 Inventories
to Cost of goods sold 3,000

DAY 30:
1,675 Sales discount
5% * (43,000- 9,500) to Customers 1,675

DAY 31:
1,500 Suppliers
to Inventories 1,500

DAY 31:
2,350 Inventories
to Cost of goods sold 2,350

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 Inventories Cash / Banks
1) 11,000 3,500 10) 10) 3,000 11,000 1)
2) 14,250 3,000 18) 28) 15,000
15) 20,000 15,500 28)
29) 3,000 1,500 31)
31) 2,350
BL. 7,000
BL. 27,100

Suppliers Customers Sales revenue

18) 3,000 14,250 2) 10) 5,000 9,500 29) 8,000 10)
31) 1,500 20,000 15) 28) 20,000 1,675 30) 35,000 28)

BL. 29,750 BL. 13,825 BL. 43,000

Cost of goods sold Sales returns Sales discount

10) 3,500 3,000 29) 29) 9,500 30) 1,675
28) 15,500 2,350 31)

BL. 13,650 BL. 9,500 BL. 1,675

INCOME STATEMENT

Sales 43,000
Returns of sales (9,500)
Sales discount (1,675)

NET SALES 31,825

Cost of goods sold * (13,650)

Gross profit 18,175

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Profit 18,175

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Periodic Inventory System:

DAY 1:
12,000 Purchases
Cash / Banks 11,000
Purchase discount (rapid 1,000
payment)
(10,000 + 2,000 = 12,000; 12,000 - (10% * 10,000) = 11,000

DAY 2:
14,250 Purchases
15,000 -5% = 14,250 to Suppliers 14,250

DAY 10:
5,000 Customers
3,000 Cash
to Sales revenue 8,000

DAY 15:
20,000 Purchases
to Suppliers 20,000

DAY 18:
3,000 Suppliers
to Purchase returns 3,000

DAY 28:
15,000 Cash / Banks
20,000 Customers
to Sales revenue 35,000

DAY 29:
9,500 Sales returns
To Customers 9,500

DAY 30:
1,675 Sales discount
5 % * 33,500 to Customers 1,675

DAY 31:
1,500 Suppliers
to Purchase discount 1,500

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 Purchases Cash / banks Purchase discount
(rapid payment)
1) 12,000 10) 3,000 11,000 1) 1,000 1)
2) 14,250 28) 15,000
15) 20,000

BL. 46,250 BL. 7,000 BL. 1,000

Suppliers Customers Sales revenue

18) 3,000 14,250 2) 10) 5,000 9,500 29) 8,000 10)
31) 1,500 20,000 15) 28) 20,000 1,675 30) 35,000 28)

BL. 29,750 BL.13,825 BL. 43,000

Purchase returns Sales returns Sales discount

3,000 18) 29) 9,500 30) 1,675

BL. 3,000 BL.9,500 BL.1,675

Purchase discount
1,500 31)

BL. 1,500

INCOME STATEMENT (periodic inventory system)

Sales revenue 43,000

-Sales returns (9,500)
-Sales discount (1,675)
_______
Net sales 31,825

Cost of goods sold: (13,650)

Purchases 46,250
-Purchase returns (3,000)
-Purchase discount (1,500)
+Beginning inventory 0
-Ending inventory (27,100)
-Purchase discount rapid pay (1,000)

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Gross profit 18,175

5.5. NET INCOME

The outcome of accounts involved of a company, which uses the periodic inventory system
are as follows:

Amount (in euro)

Gross Sales 8,000

Sales Returns 500
Initial inventory 1,000
Gross purchases 3,500
Purchase discounts and allowance 400
General expenses 1,200

The value of the inventory through physical count at the end of the period is CU600.

Requirement:

A) Calculate the following for this period

- cost of goods sold

- Net income

B) Make the corresponding entries for the calculation of the result

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a)
Cost of goods sold = initial inventory + net purchases - ending inventory
= 1,000 + (3,500 - 400) - 600 = 3.500 €

Net Income: COGS:

Gross Sales 8,000 Initial inventory 1,000
- Sales returns (500)

Net sales 7,500 Gross purchases 3,500

COGS (3,500) - Purchase discount (400)
Net purchases 3,100
Gross margin 4,000
4,100
General expenses (1,200) Ending inventory (600)
______
Net Income 2,800 Cost of goods sold 3,500

B)

Components of the result:

Net sales = Gross sales - Return of sales = 8000-500 = 7,500 €
Cost of goods sold = 3,500 €
General expenses = 1,200 €
Result net income: 2,800 €

Journal entries (Spanish system, use the item “inventory variation”, which is essentially the
difference between beginning inventory and ending inventory. Revenue and expense
accounts are closed to P&L):

a) 1,000 Inventory variation

to Beginning Inventory 1,000
600 Ending Inventory
to Inventory variation 600
b) 5,600 P&L
to Sales returns 500
Inventory variation 400
Purchases 3,500
General expenses 1,200

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 c) 8,000 Sales revenue
400 Purchase discount
to P&L 8,400

Net P&L = € 2,800 (=8,400 - 5,600)

International system (no “inventory variation”, use the item “Income Summary” to close
the revenue and expense accounts, just a less formal way to call net income):

Dr. Ending Inventory 600

Dr. Sales Revenue 8,000
Dr. Purchase Discount 400
Cr. Income Summary 9,000

Dr. Income Summary 6,200

Cr. Beginning Inventory 1,000
Cr. Sales Returns 500
Cr. Purchases 3,500
Cr. General Expenses 1,200

Net Income: € 2,800 (=9,000 - 6,200)

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