Thames Cotton Mills Ltd. take a periodic inventory of their stock at the end of each month. The physical inventory taken on 30th June shows a balance of 1,000 litres of chemicals at hand @ €2.28 per litre The following transactions took place during July: July 1: 14,000 litres @ €2.30 per litre July 7: 10,000 litres @ €2.32 per litre July 8: issued 6,000 litres July 9: 14,000 litres @ €2.30 per litre July 20: Issued 7,000 litres July 25: 5,000 litres @ €2.35 per litre. You are required to compute the inventory value on July 31, using each of the following methods (a) First in First out (b) Last in First out; and (c) Average cost method (d) How are the three inventory methods you have used in answering question (a) to (c) above differ from each other? Comment using the answers you generated for each of these three methods, how such answers impact on the gross profit (e) Explain three (3) most important reasons why inventory valuation must be conducted (f) Based on the theory learned in this course, explain whether inventory is valued at cost or at selling price. Reflect your answer on the income statement prepared at the end of each accounting period (g) By using the concepts learned in inventory valuation chapter, explain the underlying accounting principle relating to inventory valuation

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Thames Cotton Mills Ltd. take a periodic inventory of their stock at the end of each month. The physical inventory taken on 30th June shows a balance of 1,000 litres of chemicals at hand @ €2.28 per litre The following transactions took place during July: July 1: 14,000 litres @ €2.30 per litre July 7: 10,000 litres @ €2.32 per litre July 8: issued 6,000 litres July 9: 14,000 litres @ €2.30 per litre July 20: Issued 7,000 litres July 25: 5,000 litres @ €2.35 per litre. You are required to compute the inventory value on July 31, using each of the following methods (a) First in First out (b) Last in First out; and (c) Average cost method (d) How are the three inventory methods you have used in answering question (a) to (c) above differ from each other? Comment using the answers you generated for each of these three methods, how such answers impact on the gross profit (e) Explain three (3) most important reasons why inventory valuation must be conducted (f) Based on the theory learned in this course, explain whether inventory is valued at cost or at selling price. Reflect your answer on the income statement prepared at the end of each accounting period (g) By using the concepts learned in inventory valuation chapter, explain the underlying accounting principle relating to inventory valuation

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