ACC 5202 SEM 1 Assignment 3 Inventory Valuation

Assignment Preparation and Submission

Please read the following points carefully.

o The assignment must be made by word processing software like MS Word (2003 and above).

o Page margin should be 1 inch (2.54 cm) all around.

o The font should be ‘Times New Roman’.

o The line spacing should be double spaced.

oThe table (if any) should be nicely formatted.

oReferencing style Harvard.

ACC5202 Accounting2015 SEM 1 Assignment

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The Assignment

Harry, Sue and Lee are in partnership and started a new business called “Computer World”.Initially they are selling a single notebook item which they purchase from a renowned manufacturer. It is noted that notebook prices are slightly increasing in each order and they are in dilemma which inventory valuation method they should follow. All the partners have studied a basic accounting course at a university but have no prior experience of doing business. They are trying to make a decision about inventory valuation as which method to adopt in their business. From university learning experience Sue argued that the business should follow the LIFO inventory valuation technique that may allow paying less tax as “when the inventory prices are going up, LIFO produces the lowest income and lowest income tax”.

Requirement 1: Discuss Sue’s argument on inventory valuation. Do you agree with Sue? Why or why not? (Please make a general discussion and make your argument from a real world situation)(4 Marks)

On their discussion about inventory valuation Harry argue that instead of using LIFO inventory valuation technique the business should rather use a ‘Specific Identification’ as the business can distinctly identify the inventory (as which item is sold and which is unsold).

Requirement 2: Discuss Harry’s argument on inventory valuation. Do you agree with Harry? Why or why not?(2 Marks)

On their discussion about inventory valuation Lee argue that the business should use FIFO inventory valuation method and after one should switch to LIFO that may allow to make a huge profit to the business.

Requirement 3: Discuss Lee’s argument on inventory valuation. Do you agree with Lee? Why or why not? Discuss the accounting regulation (if any) in this regard.(3 Marks)

The partners understand that being new in business they must minimise the inventory management cost. However, as the notebooks are pretty expensive they have decided to introduce the ‘Periodic Inventory’ system.

Requirement 4a: Do you have any other suggestions? Discuss any other ways that can be used to minimise the inventory management cost.(2 Marks)

The partners have just completed the first month of their operations on 30th June 2015 and trying to reconcile their understanding of FIFO and LIFO method of inventory valuation by using both the ‘Periodic’ and ‘Perpetual’ system.

Requirement 4b: Harry used the FIFO method and noted the following: FIFO gives same Cost of Goods Sold and Closing Inventory under both periodic and perpetual. Do you agree with this conclusion? Why or why not? (2 Marks)

Requirement 4c: Sue used the LFIFO method and noted the following: LIFO does not give the same Cost of Goods Sold and Closing Inventory under both periodic and perpetual. Do agree with this conclusion? Why or why not?(2 Marks) ACC5202 Accounting2015 SEM 1 Assignment

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Requirement 4d: Refer to the requirement 4a above. To reconcile and better understand the arguments made by Harry and Sue, please do the following(15 Marks):

1.Make at least 20 hypothetical inventory transactions (20 transactions will include both purchases and sales)

2.Assume the inventory purchase price within the range of 300-350.

3.Prepare an inventory valuation sheet by using FIFO both for periodic and perpetual.

4.Prepare an inventory valuation sheet by using LIFO both for periodic and perpetual.

5.Explain what conclusion you can arrive at. Is that similar to requirement 4a above.