Inventory Purchase Accounting — Practice Problems - dummies

Inventory Purchase Accounting — Practice Problems

By Kenneth Boyd, Kate Mooney

Whenever a company buys inventory, their accountant has to record the results of these transactions in different ways. The following practice questions show how an increase in the cost of goods sold can impact a balance sheet.

Practice questions

Use the following information to answer the questions:

  • A company has depreciation expense of $1,200 and inventory purchases of $10,000. Its cost of goods sold is $7,000.

  • The company added $400 to its prepaid expenses during the year.

  • Accounts payable for inventory purchases increased $2,000.

  • The interest expense is $600, and selling and general expenses are $5,000.

  • Unpaid expenses at the end of the year included $1,500 of accrued expenses payable and $2,000 of accounts payable (unrelated to inventory).

  • The company paid $200 for interest during the year.

  1. What is the balance sheet impact to inventory as a result of the increase in cost of goods sold?

  2. What is the balance sheet impact to cash as a result of the increase in cost of goods sold?

Answers and explanations

  1. debit $3,000

    The company purchased $10,000 of inventory but recorded only $7,000 of costs of goods sold. This implies that the difference between the $10,000 purchased and the $7,000 sold, which is $3,000, still remains in inventory. Inventory is an asset account. Therefore, the remaining balance is a debit of $3,000 in inventory.

  2. credit $8,000

    The company purchased $10,000 of inventory; however, accounts payable increased only by $2,000. The difference between the purchases of $10,000 and the accounts payable increase of $2,000 is $8,000. It implies that $8,000 of purchases was paid with cash, causing a cash decrease (credit) of $8,000.

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