Question Tag: IAS 2

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  • 14 Marks

CR – May 2023 – L3 – Q2a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Analyze Octopus Petroleum’s performance and ability to finance future oil spill costs

Octopus Petroleum PLC is a multinational oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, holds reserves, and has recently become involved in the downstream sector by opening various commercial retail outlets for the sale of petrol to motorists.

In June 2020, the company was involved in an ecological disaster in the Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting in spilling oil into the surrounding ocean and damaging wildlife and local communities.

Investors are concerned about the future prospects of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.

Octopus Petroleum Group annual report for the year 2020 and its comparative figures are shown below:

Octopus Petroleum Group Consolidated Statement of Profit or Loss for the Year Ended December 31

Octopus Petroleum Group Consolidated Statement of Financial Position as at December 31

Additional Information:

  1. The N3,700 million provision for the Ogoni oil spill is an estimated cost net of relevant tax.
  2. Calculating the financial cost of the oil spill in Ogoni land has been slightly problematic. However, N530 million had been expended by year-end, while the future costs of clean-up and compensation are undetermined.
  3. One uncertain cost is fines payable to the Federal Government of Nigeria. Past fines have exceeded N2,500 million.
  4. Octopus Petroleum Group vertically integrated in 2020 by acquiring and rebranding petrol stations.
  5. Oil reserves were at record-high levels in 2020.
  6. Oil prices increased by approximately 5% during 2020.
  7. The company values inventory on a last-in-first-out (LIFO) basis, which contravenes IAS 2.
  8. Dividend payments remained at N625 million for both 2020 and 2019.
  9. Investors typically evaluate companies using these ratios:
    • Profitability Ratios:
      • Return on Capital Employed (ROCE)
      • Return on Equity (ROE)
      • Gross Profit Percentage
      • Operating Profit Percentage
    • Liquidity Ratios:
      • Current Ratio
      • Acid Test Ratio
    • Resource Utilization and Financial Position Ratios:
      • Inventory Turnover
      • Asset Turnover
      • Interest Cover
      • Gearing Ratio

Required:

(a) Analyze the performance of Octopus Petroleum Group over the two-year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years. (14 Marks)

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  • 15 Marks

FR – May 2024 – L2 – SA – Q6 – Inventory Accounting

Explains perpetual inventory system, differences in inventory counting, and disclosure requirements.

a. IAS 2 – Inventories sets out the requirements to be followed when accounting for inventory and specifies two methods of recording inventory to allow the calculation of cost of sales.

Required:
i. Explain the term ‘Perpetual inventory system’ and identify FIVE possible causes of differences between the balance on the inventory account and the physical inventory counted. (5 Marks)

ii. State the disclosure requirements for inventory in notes to the financial statements. (5 Marks)

b. Many accountants believe that Block-Chain Technology will enhance the recording of financial transactions globally.

Required:
Explain the term “Block-Chain Technology” and state THREE disadvantages of adopting the technology. (5 Marks)

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  • 1 Marks

FA – May 2012 – L1 – SA – Q28 – Accounting for Inventories (IAS 2)

Identifying the accounting concept that guides the treatment of known losses and inventory valuation.

Borox Limited makes provision for all known losses and values its inventories at the lower of cost and net realizable value. Which accounting concept is the company complying with?

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  • 1 Marks

FA – May 2012 – L1 – SA – Q13 – Accounting for Inventories (IAS 2)

Identifying the best method for inventory valuation according to IAS 2.

According to International Accounting Standard No 2 on “Inventories”, which of the following methods can best be employed for the calculation and valuation of inventories?

A. Last purchase price
B. Last-In-First-Out
C. Base stock
D. Average cost
E. Replacement cost

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  • 1 Marks

FA – Nov 2020 – L1 – SA – Q12 – Accounting for Inventories (IAS 2)

Identifies the costs to be included in inventory valuation under IAS 2 for a manufacturing company.

In accordance with IAS 2 – Inventories, which of the following costs should be included in the valuation of inventories of a manufacturing company?
A. Carriage outwards
B. Carriage inwards
C. General administrative overheads
D. Depreciation of land and buildings
E. Discount allowed

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  • 7 Marks

FR – Nov 2021 – L2 – Q3c – Inventory Accounting (IAS 2)

Enumerate the disclosure requirements for inventories under IAS 2 in financial statements.

IAS 2 – Inventories sets out the requirements to be followed when accounting for inventories.

Required:
Enumerate seven disclosure requirements for inventories to be shown in the notes to the financial statements.

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  • 5 Marks

FA – May 2014 – L1 – SA – Q1c – Accounting for Inventories in Accordance with IAS 2

why (IAS 2) on inventories is not applicable to construction contracts

Explain why International Accounting Standard (IAS 2) on inventories is not applicable to construction contracts.

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  • 5 Marks

FA – May 2014 – L1 – SA – Q1b – Accounting for Inventories in Accordance with IAS 2

costs to include and exclude when measuring inventory cost under IAS 2.

List the costs which should be included when measuring the cost of inventories and identify any cost which should be excluded.

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  • 5 Marks

FA – May 2014 – L1 – SA – Q1a – Accounting for Inventories in Accordance with IAS 2

Definition of inventories

Explain the term “inventories” as defined by International Accounting Standard (IAS 2).

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  • 1 Marks

FA – May 2014 – L1 – SA – Q2 – Accounting for Inventories in Accordance with IAS 2

Identifies costs included in inventory valuation under IAS 2.

According to IAS 2 on inventories, which of the following costs should be included in valuing the inventories of a manufacturing company?
A. Carriage inwards
B. Carriage outwards
C. General administrative overheads
D. Depreciation of land and building
E. Discount allowed

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  • 1 Marks

FA – May 2021 – L1 – SA – Q16 – Accounting for Inventories in Accordance with IAS 2

Identify a disclosure not required under IAS 2 for inventory.

Which of the following is NOT required to be disclosed under IAS 2, Inventory?

A. Accounting policies adopted for measurement of inventory
B. Physical count of inventory at the end of the period
C. Amount of inventories recognised as expense during the period
D. Carrying amount of inventories pledged as security for liabilities
E. Carrying amount of inventories carried at fair value less cost of sale

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  • 3 Marks

FR – Nov 2017 – L2 – Q2b – IAS 2, Inventory Valuation, Financial Reporting Standards

This question tests the calculation of inventory valuation according to IAS 2 for products with expected discounts and selling costs.

Esinam Ltd has the following products in inventory at the end of 2016:

Product Units Cost per Unit (GH¢)
Ahomka 5,400 22
Adonko 2,800 26

Each product normally sells at GH¢34 per unit. Due to the difficult trading conditions, Esinam Ltd intends to offer a discount of 15% per unit and expects to incur GH¢4 per unit in selling costs. GH¢10 per unit is expected to be incurred to complete each unit of Adonko.

Required: In accordance with IAS 2 Inventories, at what amount should inventory be stated in the financial statements of Esinam Ltd as at 31 December 2016?

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  • 1 Marks

FA – May 2017 – L1 – SA – Q6 – Accounting for Inventories in Accordance with IAS 2

Deals with IAS 2 on inventories and the financial statements that pertain to it.

IAS 2 deals with
A. Statement of Financial Position
B. Statement of Comprehensive Income
C. Statement of Cash Flow
D. Inventories
E. Depreciation

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  • 1 Marks

FA – May 2016 – L1 – SA – Q6 – Accounting for Inventories in Accordance with IAS 2

A question about the components that are part of the cost of inventories according to IAS 2.

Question:
Which of the following is NOT part of the cost of inventories, in relation to IAS 2 Inventories?
A. The purchase price
B. Import duties
C. Transport costs
D. Handling costs
E. Selling costs

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  • 6 Marks

FA – May 2024 – L1 – SB – Q5a -Accounting for Inventories (IAS 2)

Explains the essential components involved in measuring inventories under IAS 2.

a. Explain the essential components involved in measuring inventories in compliance with IAS 2 – Inventories. (6 Marks)

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  • 10 Marks

AAA – May 2017 – L3 – Q5b – Audit evidence | Reporting

Discuss the audit considerations related to inventory valuation at lower of cost and net realizable value and the implications of a refund policy on the audit report.

You are an audit senior in Patampa and Associates, and nearing the end of the audit of Duakor Ltd. for the year ended 30 June 2016. Duakor Ltd owns a chain of clothing stores and also has a manufacturing division where it makes its own label brand “Dumas.” Own label clothing represents 50% of the inventory and sales of Duakor Ltd. The financial statements show a profit before tax of GH¢14m (2015 GH¢6m) and a statement of financial position total of GH¢46m (2015 GH¢30m). The following points have arisen on the audit:

i) Duakor Ltd. values its inventory at the lower of cost and net realizable value. Cost is determined by deducting a suitable estimated profit margin from the selling price. Inventory in the statement of financial position as at 30 June 2016 was GH¢2,530,000.

ii) Duakor Ltd. has a refund policy which states that a customer who is not satisfied with their purchase may return their goods within 28 days of purchase and obtain an exchange or a cash refund. Experience has shown that exchanges and refunds are common, as Duakor Ltd’s shops do not provide fitting rooms, space being at a premium. Duakor Ltd. does not make any provision in the financial statements for refunds.

Required:

Comment on the matters you will consider in relation to the implications of the above points on the audit report of Duakor Ltd. (10 marks)

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  • 12 Marks

AAA – April 2022 – L3 – Q3a Evaluation and review

Explain the reporting implications and auditors' responsibilities for events after the reporting period for Aseda Manufacturer Ltd.

Aseda Manufacturer Ltd (Aseda) is one of the established businesses in the manufacturing sector. The company has received different awards over the past decade. Aseda’s year-end was 30 September 2020. The audit of Aseda is nearly complete, and the financial statements and the audit report are due to be signed in a few days. However, the following additional information on two material events has just been presented to the auditor on 3 December 2020.

  1. Event 1:
    This event occurred on 10 November 2020. Production at the Aluta factory was halted for one day when a truck carrying dye used in colouring the fabric on mattresses reversed into a metal pylon, crashing the vehicle and causing dye to spread across the factory premises and into a local river. The Environmental Protection Agency (EPA) of Ghana is currently considering whether the release of the dye was in breach of environmental legislation. The company’s insurers have not yet commented on the event.
  2. Event 2:
    This event occurred on 19 October 2020. The springs in a new type of mattress have been found to be defective, making the mattress unsafe for use. There have been no sales of this mattress as it was due to be marketed in the next few weeks. The company’s insurers estimate that inventory worth GH¢600,000 has been affected. The insurers also estimate that the mattresses are now only worth GH¢100,000. No claim can be made against the supplier of springs as this company is in liquidation with no prospect of any amounts being paid to third parties. The insurers will not pay Aseda for the fall in value of the inventory as the company was underinsured. All of this inventory was in the finished goods store at the end of the year and no movements of inventory have been recorded post year-end.

Required: a) For each of the two events above: i) Explain the reporting implication of the issues in accordance with IAS 10: Events after the Reporting Period. (4 marks)
ii) Explain the auditors’ responsibility and the audit procedures that should be carried out in accordance with ISA 560: Subsequent Events. (12 marks)

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  • 20 Marks

FA – Nov 2017 – L1 – Q2 – Inventory

Calculation of inventory value, cost of sales, gross profit, net profit, and net assets for Adepa Ltd, using FIFO method and interpretation of IAS 2.

 

You took over from a Trainee Accountant after he had prepared a draft account for the year ended 31 December 2016. A careful examination of the Income Statement revealed the following:

i) There is no figure for closing inventory. However, the December 31, 2015 Statement of Financial Position has a figure of GH¢60,000 as closing inventory value. The closing stock was valued on First In, First Out (FIFO) basis. There were 600 items, valued at GH¢100 per item.

ii) Purchases during the year were:

Date Number of Items Cost per item (GH¢)
01/03/2016 1,600 110
01/06/2016 2,500 120
01/09/2016 3,500 130
01/12/2016 4,000 140

iii) Sales during the year were:

Date Number of Items Price per item (GH¢)
01/02/2016 400 210
01/05/2016 1,000 200
01/08/2016 2,000 215
03/12/2016 4,000 250

iv) Other costs captured in the books of Account during the year 2016 were:

Cost Description Amount (GH¢)
Staff cost 55,000
Rent of premises 47,500
Administrative Expenses 23,500
Marketing cost 44,200
Carriage inwards 5,100
Carriage outwards 6,200
Depreciation 13,500

195,000

Required:
a) Calculate
i) The number of items in inventory at 31/12/2016. (2 marks)
ii) The value of inventory at 31/12/2016 on FIFO basis. (2 marks)

b) Using the revised inventory value calculated in (a) above, calculate
i) Cost of sales for 31/12/2016 (3 marks)
ii) Gross Profit for 31/12/2016 (2 marks)
iii) Net Profit for 31/12/2016 (2 marks)
iv) Net Assets for 31/12/2016 if the figure prepared by the Trainee Accountant was GH¢96,500. (2 marks)

c) State the basic rule set out in IAS 2 – Inventories, which is to be applied to the valuation of inventory. (2 marks)

d) Describe how a business would verify the quantity of inventory held at the year end. (5 marks)

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