Question Tag: Inventory Valuation

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  • 15 Marks

AAA – Nov 2024 – L3 – Q2a – Audit Risks and Responses for Ecowud Co. LTD

Identifying audit risks in Ecowud Co. LTD and how auditors should respond.

Ecowud Co. LTD (Ecowud) is a sustainable goal-oriented company that develops, manufactures, and sells plywood made from rice husk and plastic waste. The company has a wide customer base, including construction companies and furniture manufacturers across Ghana and West Africa.

You are the Audit Manager of Adomako & Associates and are planning the audit of Ecowud for the year ended 31 December 2023. You and the Audit Engagement Partner attended a planning meeting with Ecowud’s Finance Manager.

You are reviewing the initial meeting notes to develop the audit strategy and plan. The following key matters were captured:

  1. Development Expenditure: Revenue for the year was forecast at GH¢32 million. During the year, Ecowud spent GH¢3.5 million on developing new types of plywood. Some of these are in the early stages of development, while others are nearing completion. The Finance Manager intends to capitalize the entire GH¢3.5 million spent on development since all projects are likely to succeed.

  2. Inventory Valuation: Ecowud uses a standard costing method to value inventory. However, the company has never updated its standard costs since adopting this policy. The company operates multiple warehouses in Ghana and across West Africa, most of which are third-party rented premises.

  3. Accounting Software: A new accounting software was developed internally and implemented in August. The old and new software did not run parallel, as management deemed it burdensome. Two months after implementation, the IT Manager resigned, and a new IT Manager will take over in January 2024.

  4. Long-term Loan and Share Capital: Ecowud restructured its finances, raising GH¢2 million through share issuance and GH¢3.5 million through a long-term loan. The loan has bank-imposed financial conditions, including a minimum total asset level. If breached, the loan becomes immediately repayable.

  5. Revaluation of Land & Buildings: Ecowud follows a revaluation model for land and buildings. The Finance Manager has announced that all land and buildings will be revalued at the year-end.

Required:
Identify FIVE audit risks in relation to Ecowud Co. LTD and for each risk, explain how the auditor should respond.

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  • 10 Marks

FA – Nov 2024 – L1 – Q5a – Inventory Loss and Statement of Profit or Loss

Compute inventory loss due to fire and prepare a statement of profit or loss for a sole trader.

Mawulolo Enterprise is a retail business that prepares its accounts on 31 March each year. The business maintains a standard gross profit margin of 30% on sales.

The following financial information was extracted from its records as at 31 March 2024:

Item GH¢
Inventory at 1 April 2023 254,000
Operating Expenses 378,000
Finance Cost 58,000
Purchases 1,306,000
Sales 1,900,000
Inventory in good standing at 31 March 2024 192,000

On 31 March 2024, a fire outbreak in the warehouse destroyed some of the inventory records and goods.

The tax charge for the year is estimated at GH¢30,000.

Required:

i)Calculate the amount of inventory lost.

ii) Prepare the Statement of Profit or Loss for the year ended 31 March 2024

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  • 20 Marks

AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

Maideline Nigeria Limited manufactures tyres for use by cars, trucks, and trailers. The company is owner-managed, meaning the shareholders are also the directors. On June 1, 2020, the directors decided to wind up the company due to the high cost of operations, the Naira’s depreciation against the US dollar, and the economic impact of COVID-19, which have severely impacted the company’s ability to continue business.

Management notified employees, suppliers, and customers that Maideline would cease all manufacturing activities by September 30. Consequently, all factory workers and most employees in accounts and administration were terminated effective September 30. Remaining employees will face redundancy by November 30. A minimal head office team, including the Company Secretary and some support staff, will remain operational for a few more years until the company winds down completely.

Maideline operated 20 branches and a head office. Of these, 12 branches are located in company-owned buildings, while the remaining 8 operate from leased buildings with lease terms of three to five years. Lease agreements prohibit sub-letting and sale. On adopting IFRS 16, the entity assumed lease renewals at term end, recording lease liabilities and right-of-use assets. A small head office building will remain in use until its lease expires in three years. Maideline accounts for its tangible non-current assets at cost, less depreciation, and has recognized deferred tax assets due to past tax losses and unutilized capital allowances.

All products sold carry a one-year warranty. Until May 31, 2020, the company offered two- and three-year extended warranties, but these were discontinued from March 1, 2020. Maideline distributes products nationally and internationally under three-year agreements and maintains annual supplier contracts. While no distributors or suppliers have pursued legal actions, some are withholding payments, awaiting penalty settlements they claim are due.

Required:
Using the information provided, identify and explain the financial statement risks to be taken into account in planning the final audit of Maideline in respect of the year ended December 31, 2020. (20 Marks)

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 10 Marks

PSAF – May 2021 – L2 – Q5a – Public Sector Financial Statements

Identification of inventory costs excluded under IPSAS 12 and disclosure requirements for financial statements.

IPSAS 12 on Inventories deals with the valuation and presentation of inventories in the financial statements in the context of the historical cost system, the most widely adopted basis on which financial statements are presented.

Required:

In accordance with IPSAS 12, identify FOUR costs that are excluded from the cost of inventories and FOUR requirements to be disclosed in the financial statements.

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  • 30 Marks

FR – Nov 2014 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Analyze a trial balance to prepare financial statements, compute impairment, and adjust inventories for a corporate entity.

The Trial Balance of Excellent Plc. as at 30 June 2014 is as follows:

 

The following notes are relevant:
i. Inventories as at 30/6/2013:

The net realisable values of these commodities per unit are as follows:

ii. Inventories on 30 June 2014 amounted to N9,000,000

iii. Prepaid salaries and wages were N10,000,000

iv. Included in the plant and machinery maintenance cost was depreciation of
N14,800,000.

v. The allowances for receivables are no longer required. The outstanding 10%
loan notes interest was paid on 30 June 2014 and this has not been accounted
for. The fair value of goods is N40,000,000 at the end of the year.

vi. The value in use of delivery van for the year 30 June 2014 is N31,000,000. The
prevailing market interest rate is 21% per annum and the Discounting Factor for
this year is 0.8264.

vii. The fair value of delivery van at an arm’s length transaction as at 30 June 2014
was N28,000,000 and the cost to sell was N2,000,000. All non-current assets
were depreciated at 10% per annum on reducing balance basis.

viii. Current tax provision for the year is N165,000,000.

Required:

a. Identify any FOUR of the cost items that are EXCLUDED in the valuation of inventories under IAS 2. (4 Marks)

b. Calculate the following:

  • (i) Value of opening inventories to be included in the Statement of Profit or Loss and Other Comprehensive Income. (2 Marks)
  • (ii) The present value in the use of delivery van (1 Mark)
  • (iii) The fair value and recoverable amount of delivery van (2 Marks)
  • (iv) The carrying amount and impairment if any on delivery van (2 Marks)

c. Prepare the Statement of Profit or Loss and Other Comprehensive Income (OCI) and Statement of Changes in Equity for the year ended 30 June 2014. (11 Marks)

d. Prepare the Statement of Financial Position as at 30 June 2014. (8 Marks)

Show all relevant workings

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  • 30 Marks

PM – Nov 2016 – L2 – Q1 – Decision Making Techniques

Evaluate profit maximization, machine bottlenecks, and inventory valuation using marginal and throughput accounting approaches.

Hicenta Limited makes three products Soyi, Milco and Yoghurt. All the three
products must be offered for sale each month in order to provide a complete
market service. The products are fragile and their quality deteriorates rapidly
shortly after production.
The products are produced on two types of machine and worked on by a single
grade of direct labour. Fifty direct employees are paid N80 per hour for a
guaranteed minimum of 160 hours per month.
All the products are first pasteurised on a machine type A and then finished
and sealed on a machine type B.
The machine hour requirements for each of the products are as follows:

Machine Information:

Machine Type Product Hours per Unit
Machine A Soyi 1.5
Machine A Milco 4.5
Machine A Yoghurt 3.0
Machine B Soyi 1.0
Machine B Milco 2.5
Machine B Yoghurt 2.0

The capacity of the available machines type A and B are 6,000 hours and 5,000
hours per month respectively. Details of the selling prices, unit costs and
monthly demand for the three products are as follows:

Product Costs and Demand:

Product Selling Price (N per unit) Concentrate Cost (N per unit) Other Direct Material Cost (N per unit) Direct Labour Cost (N per unit) Overheads (N per unit) Profit (N per unit) Maximum Monthly Demand (units)
Soyi 910 220 230 60 240 160 1,200
Milco 1,740 190 110 480 620 340 700
Yoghurt 1,400 160 140 360 520 220 600

Although, Hicenta Limited uses marginal costing and contribution analysis as
the basis for its decision making activities, profits are reported in the monthly
management accounts using the absorption costing basis. Finished goods
inventories are valued in the monthly management accounts at full absorption
cost.
You are required to:

a. Calculate the monthly machine utilisation rate for each product and
explain which of the machines is the bottleneck/limiting factor.
(6 Marks)
b. Use current system of marginal costing and contribution analysis to
calculate the profit maximising monthly output of the three products.
(6 Marks)
c. Explain why throughput accounting might provide more relevant
information in Hicenta‟s circumstances. (6 Marks)
d. Use a throughput approach to calculate the throughput-maximising
monthly output of the three products. (6 Marks)
e. Explain the throughput accounting approach to optimizing the level of
inventory and its valuation. Contrast this approach to the current system
employed by Hicenta. (6 Marks)

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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 – May 2012 – L1 – SA – Q10 – Elements of Financial Statements

Identifying which element is not affected when the proprietor consumes goods.

The value of goods taken by the proprietor of a firm for his consumption will affect all but ONE of the following:

A. Gross profit
B. Net profit
C. Inventory balance
D. Company’s capital
E. Inventory valuation.

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  • 1 Marks

FA – Nov 2011 – L1 – SA – Q6 – Accounting for Inventories (IAS 2)

This question asks about the basis for valuing stock in a trading company.

What is the basis of valuing stock in a trading company?

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  • 4 Marks

MA – Nov 2015 – L2 – Q1b – Standard costing and variance analysis

Evaluate four purposes of standard costing.

Evaluate FOUR (4) purposes of standard costing. (4 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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  • 10 Marks

AAA – Nov 2018 – L3 – Q5b – Reporting, Audit evidence

Determining the type of audit opinion for incorrect inventory valuation and drafting the audit report paragraphs.

You have just audited the financial statements of Yawa Company Ltd for the year ended 31 December 2017. You discovered during the audit that inventories were not stated at the lower of cost and net realizable value but stated solely at cost on the statement of financial position.

Records of the company indicated the cost of the inventories to be GH¢600,000, of which the net realizable value was GH¢400,000. Management is not prepared to adopt the lower of cost and net realizable principle in their inventory valuation.

Required:
i) Identify and justify the type of opinion you will issue. (2 marks)

ii) Prepare the appropriate paragraphs under management responsibility, auditor’s responsibility, and the auditor’s opinion for inclusion in the audit report of Yawa Company Limited. (8 marks)

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  • 20 Marks

AAA – May 2018 – L3 – Q1 -Planning, Audit Evidence, Evaluation and Review

This set of questions requires a comprehensive approach to investigating the losses incurred by PQR Ltd., focusing on key areas such as planning the investigation, evaluating potential undervaluation of inventory, performing tests to quantify any undervaluation, identifying reasons for high material consumption, and verifying the accuracy of material consumption in the management accounts. The investigation involves considerations like resource allocation, scope definition, inventory count accuracy, valuation methods, wastage, theft, and cut-off procedures.

As the Senior Audit Manager in MNO & Co, a firm of Chartered Accountants, you have
just had a meeting with a Senior Partner at the firm, in which he informed you that you
have to carry out an investigation requested by the Management of ECO Ltd.

i) One of ECO Ltd’s subsidiaries, PQR Ltd, has been making losses for the past year. ECO Ltd’s management is concerned about the accuracy of PQR’s most recent quarter’s management accounts. The summarised statements of profit or loss for the last three quarters are as follows:

Quarter to 31-Mar 2018

GH¢’000

 Quarter to 31-Dec 2017

GH¢’000

 Quarter to 30-Sep 2017

GH¢’000
Revenue 429  334  343
Opening inventory 180 163 203
Materials 318 251 200
Direct wages 62 54 74
560 468 477
Less closing inventory (162) (180) (163)
Cost of goods sold 398 288 314
Gross profit 31 46 29
Less overheads (63) (75) (82)
Net loss (32) (29) (53)
Gross profit (%) 7.2% 13.8% 8.5%
Materials (% of revenue) 78.3% 70.1% 70.0%
Labour (% of revenue) 14.5% 16.2% 21.6%

ii) ECO Ltd’s management board believes that the high material consumption as a percentage of revenue for the quarter to 31 March 2018 is due to one or more of the following factors:

  • Under-counting or under-valuation of closing inventory
  • Excessive consumption or wastage of materials
  • Material being stolen by employees or other individuals

iii) PQR Ltd has a small number of large customers and manufactures its products to each customer’s specification. The selling price of the product is determined by:

  • Estimating the cost of materials;
  • Estimating the labour cost; and
  • Adding a mark-up to cover overheads and provide a normal profit.

iv) The estimated costs are not compared with actual costs. Although it is possible to analyse purchase invoices for materials between customers’ orders, this analysis has not been done.

v) A physical inventory count is carried out at the end of each quarter. Items of inventory are entered on inventory sheets and valued manually. The company does not maintain perpetual inventory records and a full physical count is to be carried out at the financial year end, 30 June 2018.

vi) The direct labour cost included in the inventory valuation is small and should be assumed to be constant at the end of each quarter.

vii) Historically, the cost of materials consumed has been about 70% of revenue. The management accounts to 31 March 2018 are to be assumed to be correct.

Required:

a) Identify and describe the matters that you should consider and the procedures you should carry out in order to plan an investigation of PQR Ltd.’s losses. (10 marks)

b) Explain the matters you should consider to determine whether closing inventory at 31 March 2018 is undervalued. (3 marks)

c) Describe the tests you should plan to perform to quantify the amount of any undervaluation. (3 marks)

d) Identify and explain the possible reasons for the apparent high materials consumption in the quarter ended 31 March 2018. (2 marks)

e) Describe the tests you should plan to perform to determine whether materials consumption, as shown in the management accounts, is correct. (2 marks)

(Total: 20 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 – Mar 2023 – L1 – Q1 – Double entry bookkeeping | Inventory | The IASB’s Conceptual Framework

Explains going concern assumption, inventory valuation, faithful representation, and prepares various day books and cash book.

a) The Conceptual Framework for Financial Reporting is a set of principles which underpin the foundation of financial accounting. The Conceptual Framework sets out the going concern concept as one of the important underlying assumptions for the preparation of financial statements.

Required:
Explain what is meant by ‘the assumption that an entity is operating under the going concern concept’. Support your answer with a suitable example. (3 marks)

b) A trader who trades in Machines commences business on 1 Jan 2021 and buys 200 machines, each costing GH¢50,000. During the year, he sells 150 machines at GH¢60,000 each.

Required:
How should the remaining machines be valued at the end of the year if:
i) He is forced to close down his business at the end of the year and the remaining machines will realise only GH¢30,000 each in a forced sale. (2 marks)
ii) He intends to continue the business into the next year. (2 marks)

c) One of the fundamental qualitative characteristics of useful financial information in the Conceptual Framework for Financial Reporting is ‘faithful representation’.

Required:
Explain what is meant by ‘faithful representation’. (3 marks)

d) Davidco is a trader who commenced business on January 1, 2021. He introduced capital of GH¢50,000. He bought Vehicle worth GH¢30,000 out of the capital introduced. The following transaction took place in the month of January (Jan) 2021:

  • Jan 5: Davidco bought goods on credit from the following:
    • Tradco: GH¢2,500, Trade Discount 10%
    • Vamco: GH¢8,000, Trade Discount 10%
  • Jan 8: Davidco Sold goods on credit to the following:
    • Markcom: GH¢5,000, Trade Discount 20%
    • Kathrine: GH¢2,000, Trade Discount 5%
  • Jan 12: Davidco returned defective goods worth GH¢200 to Tradco.
  • Jan 15: Davidco paid all amounts outstanding to Tradco and Vamco less cash discount of 5%.
  • Jan 22: Kathrine returned spoiled goods worth GH¢300.
  • Jan 24: Davidco received payment from Markcom and Kathrine of all outstanding debt less cash discount of 5%.

Required:
Prepare the following:
i) Sales day book
ii) Purchase day book
iii) Cash book
iv) Purchase returns
v) Sales returns

(10 marks)

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  • 20 Marks

FA – May 2019 – L1 – Q6 – Inventory

Advise on the valuation of inventory under IAS 2, including calculation of closing inventory value, and identification of excluded costs.

a) Mr. Alex Azugu, the managing director of Tojo Ltd, has a number of specific queries in relation to Inventory and has asked you for advice in relation to IAS 2: Inventories. As part of its overall inventory, Tojo Ltd has three items of inventories whose costs and Net Realisable Values (NRV) are as follows:

Inventory Items Item Cost (GH¢) NRV (GH¢)
1 72 80
2 56 48
3 92 96
Total 220 224

Required:
i) The closing value of each item of inventory and hence the total value of closing inventory for these items for Tojo Ltd at the year-end. (2 marks)
ii) The items that comprise inventory. (2 marks)
iii) THREE (3) examples of costs which are specifically excluded from the costs of inventories and instead are recognized as expenses in the period in which they are incurred. (3 marks)
iv) THREE (3) situations in which net realizable value is likely to be less than cost. (3 marks)

b) Davis Ltd’s closing inventory as at 31 December 2018 is GH¢347,841. This includes GH¢4,640 for items accidentally destroyed on 31 December 2018 after the count was completed. Also included is GH¢2,980 which relates to the cost of inventory damaged in October 2018, which can be reworked at a cost of GH¢680 and then sold for GH¢2,410.

Required:
Calculate the closing value of inventory at the year-end. (4 marks)

c) Danqua Ltd is in the process of finalizing its financial statements for the year ended 31 March 2019. The draft statements were completed on 14 April 2019, and the audit is currently in progress. The financial statements are expected to be approved by the board of directors on 15 May 2019 and published on 20 May 2019. The following matters have come to light during the audit, and your advice is requested. No adjustment has yet been made for any of the following:
i) Closing inventory at 31 March 2019 includes 100 items carried at cost GH¢5,000 each. New safety regulations were announced on 5 April 2019 with immediate effect. The items of inventory do not comply with these regulations. As a result, the net realizable value of the inventory is only GH¢4,500 each.
ii) An investment in unquoted equity instruments was held by Danqua Ltd at 31 March 2019 at an amount of GH¢3.5 million. This was its fair value on 30 September 2018, the most recent reporting date. Due to the unavailability of professional valuers, an updated fair value was not available until 15 April 2019. On this date, the valuer provided an estimated fair value of GH¢2.8 million.

Required:
In each case (i) to (ii) above, prepare a briefing note advising on the accounting treatment and/or disclosures required as a result of the event(s) after the reporting date. (6 marks)

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  • 20 Marks

IMAC – NOV 2023 – L1 – Q4 – Accounting for Inventory and Labour | Standard Costing and Variance Analysis

Calculate closing inventory using FIFO and compute direct material price and usage variances for Prekese and Kakaduro.

a) The following data has been extracted from the books of ABC Ltd for the month of October 2023.

Date Description
2/10/2023 Bought 200 units @ GH₵100 per unit
5/10/2023 Bought 150 units @ GH₵120 per unit
8/10/2023 Issued 120 units
12/10/2023 Bought 100 units @ GH₵90 per unit
20/10/2023 Issued 140 units
24/10/2023 Bought 300 units @ GH₵150 per unit
28/10/2023 Issued 210 units

Required:
Using the FIFO method, calculate the value of the closing inventory. (10 marks)

b) Identify FOUR (4) pieces of information that can be seen on an invoice. (5 marks)

c) Preka body lotion is a product produced from the combination of two materials: prekese and kakaduro. Preka body lotion has a standard direct material cost as follows:

Material Quantity (kg) Cost per kg (GH₵) Total Cost (GH₵)
Prekese 6 15 90
Kakaduro 10 10 100

During period one, 1,000 units of Preka body lotion were manufactured, using 11,700 kilograms of prekese and 10,000 kilograms of kakaduro, costing GH₵98,600 and GH₵78,000 respectively.

Required:
Calculate the following variances for prekese and kakaduro:
i) The direct material price variance (2.5 marks)
ii) The direct material usage variance (2.5 marks)

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  • 20 Marks

FA – Nov 2018 – L1 – Q4 – Inventory | The IASB’s Conceptual Framework

Explain the going concern concept, value inventory under different conditions, and outline the responsibilities of directors in preparing financial statements.

a) The Conceptual Framework for Financial Reporting is a set of principles which underpin the foundation of financial accounting. The Conceptual Framework sets out the going concern concept as one of the important underlying assumptions for the preparation of financial statements.

Required:
Explain the going concern concept, illustrating your answer with suitable examples. (5 marks)

b) A trader who trades in computers commences business on 1 January 2018 and buys 100 computers, each costing GH¢3,500. During the year, he sells 80 machines at GH¢5,000 each.

Required:
How should the remaining machines be valued at the end of the year if:
i) He is forced to close down his business at the end of the year and the remaining machines will realize only GH¢2,000 each in a forced sale. (2 marks)
ii) He intends to continue the business into the next year. (2 marks)

c) One of the fundamental qualitative characteristics of useful financial information in the Conceptual Framework for Financial Reporting is ‘faithful representation’.

Required:
Explain what is meant by ‘faithful representation’. (5 marks)

d) Those charged with governance of a company are responsible for the preparation of the financial statements. The board of directors of a company are usually the top management in a Small and Medium Enterprise and are those who are charged with governance of the company. The responsibilities and duties of directors are usually laid down in law and are wide-ranging.

Required:
State THREE (3) responsibilities of directors towards the preparation of financial statements. (6 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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