Capstone Practice: From Transactions to Financial Statement Impact

This capstone mini-case gives you one complete period of inventory activity and asks you to translate transactions into (a) journal entries under periodic and perpetual systems, (b) FIFO and weighted-average cost results, and (c) a short summary of how gross profit and the balance sheet change. Use it as a self-check: your final numbers should tie together across entries, schedules, and financial statement impact.

Mini-case: One-month inventory cycle (single product)

Company: Cedar Supply Co. Period: April (30 days). Product: “Widget” (units are identical). Assume: All purchases and sales are on account (A/P and A/R). Ignore sales tax and income tax. Use a perpetual inventory subsidiary record when asked. Freight terms are stated per transaction. Discounts are based on invoice price (not including freight) unless stated otherwise.

Beginning balances (April 1)

• Beginning inventory: 100 units @ $10.00 = $1,000

April transactions

Your tasks (what you should produce)

Task 1 — Journal entries (two versions)

Create two complete sets of entries for April:

• A. Periodic system entries (Purchases, Freight-in, Purchase Returns and Allowances, Purchase Discounts, Sales, Sales Returns; plus period-end adjusting entries for inventory and write-down).
• B. Perpetual system entries (Inventory updated each purchase/return; COGS recorded at each sale/return; plus period-end entries for shrinkage and write-down).

Important: Under periodic, you will not record COGS at the time of sale. Under perpetual, you will.

Task 2 — Costing schedules (two methods)

Compute COGS and ending inventory at cost (before the write-down) under:

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• FIFO
• Weighted average (use a periodic weighted-average for the periodic system; for perpetual, use moving average if your course requires it—if not specified, compute periodic weighted-average as a separate schedule for comparison).

Then compute the write-down amount for the 15 damaged units and present ending inventory after write-down.

Task 3 — Financial statement impact summary

Summarize (for each costing method) the impact on:

• Gross profit (Sales − COGS, net of sales returns)
• Ending inventory on the balance sheet (after write-down)

Work area: key computations you will need

1) Purchase-side computations (discounts, returns, freight)

Use these to build your entries and your cost layers.

• Apr 3 purchase invoice amount: 200 × $11 = $2,200
• Apr 6 return amount: 20 × $11 = $220 credit
• Net invoice eligible for discount (Apr 3): $2,200 − $220 = $1,980
• Purchase discount (2%): $1,980 × 2% = $39.60
• Cash paid Apr 9: $1,980 − $39.60 = $1,940.40
• Freight-in Apr 4: $120 (allocate into inventory cost; for unit-cost schedules, treat as part of the Apr 3 batch cost)

Units from Apr 3 remaining after return: 200 − 20 = 180 units.

Net cost of Apr 3 batch for costing schedules (common approach): Invoice net of discount + freight-in = $1,980 − $39.60 + $120 = $2,060.40 for 180 units.

Implied unit cost for the Apr 3 batch (after discount + freight): $2,060.40 ÷ 180 = $11.4467 (carry reasonable rounding in schedules; keep full precision in intermediate steps if possible).

2) Sales-side computations (net sales units)

• Apr 15 sale: 180 units @ $20 = $3,600
• Apr 18 sale: 120 units @ $21 = $2,520
• Apr 20 sales return: 10 units @ $21 = $210 reduction of sales (and units return to inventory under perpetual)
• Net units sold for the month: 180 + 120 − 10 = 290 units
• Net sales revenue: $3,600 + $2,520 − $210 = $5,910

3) Units available and expected shrinkage indicator

Compute total units available for sale and compare to physical count to infer shrinkage (if any).

• Beginning units: 100
• + Purchases: (200 − 20) + 150 + 100 = 430
• = Units available: 530
• − Net units sold: 290
• = Book ending units (before count): 240
• Physical count ending units: 205
• = Shortage/shrinkage units: 35

Under perpetual, you will typically record an entry to recognize the shrinkage at period-end (credit Inventory for the cost of missing units; debit an expense such as Inventory Shrinkage or COGS, depending on your policy).

Expected output structure (use this to self-check)

Section A — Journal entries list

Prepare your entries in date order. Use the following templates and fill in amounts.

A1) Periodic system — required entries

Apr 3   Dr Purchases ........................................ xxx   Cr Accounts Payable .......................... xxx  (200 @ $11)  Apr 4   Dr Freight-in ....................................... xxx   Cr Cash/AP ..................................... xxx  (freight)  Apr 6   Dr Accounts Payable ............................... xxx   Cr Purchase Returns & Allowances ............. xxx  (20 @ $11)  Apr 9   Dr Accounts Payable ............................... xxx   Cr Purchase Discounts .......................... xxx   Cr Cash ........................................ xxx  (2% on net)  Apr 12  Dr Purchases ........................................ xxx   Cr Accounts Payable .......................... xxx  (150 @ $12)  Apr 15  Dr Accounts Receivable ............................. xxx   Cr Sales Revenue ............................... xxx  (180 @ $20)  Apr 18  Dr Accounts Receivable ............................. xxx   Cr Sales Revenue ............................... xxx  (120 @ $21)  Apr 20  Dr Sales Returns & Allowances ..................... xxx   Cr Accounts Receivable ........................ xxx  (10 @ $21)  Apr 26  Dr Purchases ........................................ xxx   Cr Accounts Payable .......................... xxx  (100 @ $13)  Apr 30  Period-end adjustments (periodic):         1) Update inventory and recognize COGS via closing/adjusting entries (format depends on your course’s periodic closing approach).         2) Record write-down for damaged units (15 units to NRV $8). 

Note: Your periodic “inventory update” is often presented as closing entries to move Purchases/contra accounts into COGS and to update Inventory from beginning to ending. Follow your course’s preferred periodic closing format, but ensure your final COGS and ending Inventory match your costing schedule.

A2) Perpetual system — required entries

Apr 3   Dr Inventory ........................................ xxx   Cr Accounts Payable .......................... xxx  Apr 4   Dr Inventory ........................................ xxx   Cr Cash/AP ..................................... xxx  Apr 6   Dr Accounts Payable ............................... xxx   Cr Inventory ................................... xxx  Apr 9   Dr Accounts Payable ............................... xxx   Cr Inventory (discount) ........................ xxx   Cr Cash ........................................ xxx  Apr 12  Dr Inventory ........................................ xxx   Cr Accounts Payable .......................... xxx  Apr 15  Dr Accounts Receivable ............................. xxx   Cr Sales Revenue ............................... xxx         Dr Cost of Goods Sold .............................. xxx   Cr Inventory ................................... xxx  Apr 18  Dr Accounts Receivable ............................. xxx   Cr Sales Revenue ............................... xxx         Dr Cost of Goods Sold .............................. xxx   Cr Inventory ................................... xxx  Apr 20  Dr Sales Returns & Allowances ..................... xxx   Cr Accounts Receivable ........................ xxx         Dr Inventory ........................................ xxx   Cr Cost of Goods Sold .......................... xxx  Apr 26  Dr Inventory ........................................ xxx   Cr Accounts Payable .......................... xxx  Apr 30  Dr Inventory Shrinkage (or COGS) ................... xxx   Cr Inventory ................................... xxx  (to adjust to physical count)        Dr Loss on Inventory Write-down (or similar) ....... xxx   Cr Inventory ................................... xxx  (15 units down to NRV $8) 

Reminder: Under perpetual, the amounts credited to Inventory at each sale/return depend on the costing method you apply (FIFO vs average). That is why you must build a perpetual inventory record (or at least a cost flow schedule) to compute the COGS amounts for Apr 15, Apr 18, and the Apr 20 return.

Section B — Costing schedule (FIFO and weighted average)

Present two schedules. Use units and extended costs. Keep freight and discounts embedded in the Apr 3 batch as computed above.

B1) FIFO schedule (periodic-style cost flow)

Step 1: Build layers available for sale

Step 2: Allocate FIFO to ending inventory (205 units from most recent layers)

• From Apr 26 layer: 100 units @ $13.00
• Plus from Apr 12 layer: 105 units @ $12.00

FIFO ending inventory at cost (before write-down): (100 × 13) + (105 × 12) = $1,300 + $1,260 = $2,560.00

FIFO COGS (before write-down): Total available $6,160.40 − Ending inventory $2,560.00 = $3,600.40

B2) Weighted-average schedule (periodic weighted average)

Step 1: Compute average unit cost

• Total cost available: $6,160.40
• Total units available: 530
• Weighted-average unit cost: $6,160.40 ÷ 530 = $11.6234 (rounded)

Step 2: Apply average to ending inventory and COGS

• Ending inventory at cost (before write-down): 205 × $11.6234 = $2,382.80 (rounded)
• COGS (before write-down): $6,160.40 − $2,382.80 = $3,777.60 (rounded)

Check: Units sold (net) 290 × $11.6234 ≈ $3,370.79, but your COGS here is based on total available minus ending; differences come from rounding. Keep consistent rounding across the schedule.

B3) Write-down computation (applies after you have ending inventory at cost)

Physical ending inventory includes 15 damaged units with NRV $8 each. Compute write-down as:

• Write-down = (cost per unit − NRV) × damaged units

Compute it separately under each costing method because the cost per unit differs:

• FIFO: damaged units are part of ending inventory, which under FIFO comes from the most recent layers. In this case, ending inventory is made of Apr 26 ($13) and Apr 12 ($12) units. Unless you are told which units are damaged, a practical approach is to assume damaged units are representative of the ending mix; for self-check, assume the 15 damaged units are from the Apr 12 layer at $12 (because Apr 12 contributes 105 units to ending inventory). Write-down = (12 − 8) × 15 = $60.
• Weighted average: use the average unit cost $11.6234. Write-down = (11.6234 − 8) × 15 = $54.35 (rounded).

Ending inventory after write-down:

• FIFO: $2,560.00 − $60.00 = $2,500.00
• Weighted average: $2,382.80 − $54.35 = $2,328.45 (rounded)

Section C — Short financial statement impact summary (self-check format)

Use net sales of $5,910. Compute gross profit using COGS (before write-down) and then show the write-down as a separate expense (common presentation) or included in COGS (policy choice). For self-check, present both clearly.

Balance sheet self-check: Ending inventory should match your method’s “after write-down” amount. Under perpetual, after you post the shrinkage and write-down entries, the Inventory account should reconcile to the physical count valuation.

Income statement self-check: Net sales is the same under all methods. Differences in gross profit come from COGS differences. The write-down reduces income further (either within COGS or as a separate line), but it does not change net sales.

How to complete the capstone (step-by-step workflow)

Step 1: Build a units timeline

• Start with 100 units.
• Add purchases net of returns (Apr 3 net 180; Apr 12 150; Apr 26 100).
• Subtract sales and add back sales return to get book units.
• Compare book units to physical count to identify shrinkage units (35).

Step 2: Prepare costing schedules first (recommended)

• Compute FIFO ending inventory and COGS (you already have the self-check targets above).
• Compute weighted-average ending inventory and COGS.
• Compute write-down under each method.

Step 3: Record journal entries

• Periodic: record purchase-side and sales-side entries during the month; then use your computed COGS and ending inventory to prepare the period-end inventory/COGS closing and the write-down entry.
• Perpetual: record purchase-side entries directly to Inventory; at each sale, record Sales and COGS using your chosen method; at the sales return, reverse revenue and restore inventory at the original cost basis; at month-end, record shrinkage to bring Inventory down to the physical count, then record the write-down for the damaged units.

Step 4: Reconcile to the physical count

After all perpetual entries, your Inventory account (units and dollars) should reflect:

• 205 units on hand,
• valued at cost per your method,
• then reduced for the write-down on the 15 damaged units.