Waikato Ltd, a clothing retailer, sells both seasonal and all-season clothes. The company uses the perpetual inventory method and the First In, First Out cost flow assumption. The company has a clearance sale policy regarding seasonal clothes. Seasonal clothing items are to be sold at a 50% discount of the normal selling price during the final month of each season. The company completes purchasing seasonal clothes before the start of each season. It had the following transactions for sweaters during the period of May-July 2020. The normal selling price of each sweater is $20. It had no beginning inventory of sweaters. The winter season starts in June and ends on 31August. The financial year ends on 31 July 2020. 10 May 2020 Purchased 2000 sweaters on credit, costing $10 per unit. 14 May 2020 Purchased 1000 sweaters on credit, costing $11 per unit. 20 May 2020 Purchased 1500 sweaters on credit, costing $12 per unit. June 2020 Sold 2500 sweaters for cash. July 2020 Sold 1500 sweaters for cash. Write down the inventory accounting policy note for Waikato Ltd for the year ended 31 July 2020. Briefly explain the usefulness of the inventory figure resulting from the application of lower of cost and net realizable value.

Financial Accounting

15th Edition

ISBN:9781337272124

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter7: Inventories

Section: Chapter Questions

Problem 4CP: Golden Eagle Company began operations on April 1 by selling a single product. Data on purchases and...

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Waikato Ltd, a clothing retailer, sells both seasonal and all-season clothes. The company uses the perpetual inventory method and the First In, First Out cost flow assumption. The company has a clearance sale policy regarding seasonal clothes. Seasonal clothing items are to be sold at a 50% discount of the normal selling price during the final month of each season. The company completes purchasing seasonal clothes before the start of each season.

It had the following transactions for sweaters during the period of May-July 2020. The normal selling price of each sweater is $20. It had no beginning inventory of sweaters. The winter season starts in June and ends on 31August. The financial year ends on 31 July 2020.

10 May 2020	Purchased 2000 sweaters on credit, costing $10 per unit.
14 May 2020	Purchased 1000 sweaters on credit, costing $11 per unit.
20 May 2020	Purchased 1500 sweaters on credit, costing $12 per unit.
June 2020	Sold 2500 sweaters for cash.
July 2020	Sold 1500 sweaters for cash.

Write down the inventory accounting policy note for Waikato Ltd for the year ended 31 July 2020.
Briefly explain the usefulness of the inventory figure resulting from the application of lower of cost and net realizable value.

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