Question Tag: Inventory

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  • 20 Marks

FA – Nov 2024 – L1 – Q4- Preparation of Financial Statements for a Sole Trader

Prepare the Statement of Profit or Loss and Statement of Financial Position for a sole trader from given financial data and adjustments.

The following list of assets, liabilities, and equity as at 30 June 2023 was extracted from the books of Akuorkor, a sole trader:

Trial Balance as at 30 June 2023

Item GH¢
Plant and equipment – cost 100,000
Accumulated depreciation – Plant & Equipment 36,000
Office fixtures – cost 25,000
Accumulated depreciation – Office Fixtures 2,500
Inventory 15,250
Trade receivables and prepayments 17,500
Trade payables and accrued expenses 8,800
Bank overdraft 4,425
Loan (10% interest per annum) 47,500
Capital 58,525

Summary of Receipts and Payments for the Year Ended 30 June 2024

Receipts GH¢
Capital introduced 11,000
Cash from customers 213,750
Total Receipts 224,750
Payments GH¢
Cash drawings (Note 5) 11,225
Loan repayments (Note 7) 10,000
Payment to suppliers 87,800
Rent 11,000
Wages 45,000
Office expenses 6,250
Total Payments 171,275

Additional Information:

  1. Closing inventory on 30 June 2024 was GH¢13,925.
  2. Depreciation policies:
    • Plant & Equipment: 20% per annum reducing balance.
    • Office Equipment: 10% per annum on cost.
    • Fixtures & Fittings: Straight-line method over 4 years with a full year’s charge in the year of acquisition.
  3. GH¢2,500 worth of fixtures & fittings was introduced into the business.
  4. Prepayments and accrued expenses as at 30 June 2023:
    • Rent paid in advance: GH¢1,250
    • Accrued wages: GH¢2,150
  5. Cash drawings included:
    • Wages: GH¢3,375
    • Payments to suppliers: GH¢2,100
    • Advertising leaflets: GH¢1,300 (Half not yet distributed).
  6. Bank balance per statement: GH¢53,350 after adjusting for unpresented cheques.
  7. Loan repayments include GH¢4,750 in interest payments.
  8. Assets and liabilities as at 30 June 2024:
    • Rent paid in advance: GH¢1,350
    • Accrued wages: GH¢2,625
    • Amounts due to suppliers: GH¢6,100
    • Amounts due from customers: GH¢11,150
  9. Major customer went into liquidation owing GH¢8,000; only 20% recoverable.

Required:

Prepare:
i) Statement of Profit or Loss for Akuorkor for the year ended 30 June 2024. 
ii) Statement of Financial Position as at 30 June 2024.

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  • 8 Marks

ICMA – Nov 2024 – L1 – Q2b – Working Capital

Calculates total amount held in working capital excluding cash and equivalents.

Working Capital Calculation
A company has annual sales revenues of GH¢45 million and the following working capital periods:

Working Capital Item Period (months)
Inventory conversion period 2.5
Accounts receivable collection period 2.0
Accounts payable payment period 1.5

Production costs are 70% of sales revenue.

Required:
Calculate the total amount held in working capital excluding cash and cash equivalents.

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  • 30 Marks

AAA – May 2016 – L3 – Q1 – Risk Management in Audits

Assess key business risks and outline audit work to address risks in a retail and distribution company scenario.

Your firm was recently appointed the statutory auditors of Foodys, a limited liability company in Nigeria, for the year ended December 31, 2015. The previous auditors, from whom your firm has received professional clearance, did not wish to be re-appointed as auditors.

The principal activities of the company are the distribution and retail of fine Spanish food products. All products are imported from suppliers based in Spain and delivered to Foodys’s central warehouse in the southwest of Nigeria. The company has its own retail outlets but also supplies national supermarket chains and small independent retailers in Nigeria. Sales through Foodys’s retail outlets are on a cash basis, and sales to supermarkets and independent retailers are on credit basis.

The company maintains computerised records for inventories held at the distribution centre and retail outlets. The inventory records are supported by continuous counting procedures, and as a result, the company does not undertake a physical count at the year end.

Foodys’s retail outlets are equipped with computerised tills. As each sale is recorded, the computer updates the quantity sold and the inventory balance. The manager at each outlet is responsible for banking the takings on a daily basis.

During the year, the company engaged consultants to design and implement the company’s new website with online ordering facilities. Under the terms of the contract, the website was scheduled to be operational by the end of September 2015 in order to take advantage of the high seasonal demand at this time of the year. Due to technical problems, the website was not launched until the end of November 2015. The consultants have been paid in full for their work. However, the company has commenced legal proceedings for breach of contract.

Despite failing to meet its sales targets in respect of online sales, the management accounts for the 11 months to November 30, 2015, indicate an increase in sales revenue of 12% compared with the same period in 2014. Inventory and receivables balances are significantly higher than the previous year as a result of the increased level of activity.

Management is planning to expand the retail activities of the business by opening additional retail outlets. It is hoping to fund the expansion with a bank loan and has approached the company’s bankers to provide the funding. The bankers require the audited financial statements before making a decision. Management is keen to have the funding in place to progress with the expansion and would like to have the audit completed by February 28, 2016.

Required:

(a) Identify the key business risks from the circumstances described above.
(b) List the factors which have led you to identify that risk.
(c) Outline the audit work you would perform to address the risk.

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  • 15 Marks

CR – Nov 2018 – L3 – SC – Q6 – Financial Instruments (IAS 32)

Classify cryptocurrency holdings in financial statements, addressing IAS 32, IAS 38, and IAS 2.

You have been asked to make a presentation to your team on cryptocurrencies. A snapshot of your draft presentation includes the following:

“Cryptocurrency is a new phenomenon in the financial market. A cryptocurrency is a digital or virtual currency designed to serve as a medium of exchange. Cryptocurrencies are created through cryptography, often with a maximum possible number of ‘coins’ that can exist through solutions to a complex algorithm with their value supported only by the laws of supply and demand. Cryptocurrencies are currently not regulated by government or other similar entity.

The following are some of the types of cryptocurrency in the market:

  • Bitcoin: The first-ever cryptocurrency that started the market awareness and “boom.”
  • Ethereum: A programmable currency that lets developers build different distributed apps and technologies that wouldn’t work with Bitcoin.
  • Ripple: Unlike most cryptocurrencies, it doesn’t use a blockchain to reach a network-wide consensus for transactions. An iterative consensus process is implemented, which makes it faster than Bitcoin but also makes it vulnerable to hacker attacks.

There are many merchants – both online and offline – that accept Bitcoin as a form of payment, while Ethereum and Ripple are not yet widely accepted.

Required:

Following your presentation, you are asked how a holding of cryptocurrency should be classified in the financial statements of your clients. (15 Marks)

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  • 20 Marks

AA – May 2017 – L2 – SA – Q4 – Inventory Accounting (IAS 2)

Examination of the importance of inventory and audit procedures for closing and work-in-progress inventory.

For many businesses, inventory is one of the areas requiring most attention from the auditor.

You are required to:

  1. (a) State FIVE reasons supportive of the importance of closing inventory to an Auditor. (5 Marks)
  2. (b) Prepare a list of FIVE audit procedures relevant to ascertaining the cost of work-in-progress and finished goods. (5 Marks)
  3. (c) State FIVE reasons why a physical count of inventory is important. (5 Marks)
  4. (d) List FIVE reasons why the Auditor must be present at physical inventory count. (5 Marks)

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  • 5 Marks

AA – Nov 2015 – L2 – Q3b – Internal Control Systems

Describing internal control procedures an auditor would expect for inventory management.

Describe TWO internal control procedures an auditor would expect the company to put in place in respect of inventories.

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  • 20 Marks

FR – Nov 2015 – L2 – Q2 – Presentation of Financial Statements (IAS 1)

Prepare a statement of profit or loss and other comprehensive income for Well-Being Plc.

The following trial balance has been extracted from the books of Well-Being Plc as at March 31, 2014:

N’000 N’000
Land at cost 360
Building at cost 750
Equipment at cost 588
Vehicles at cost 852
Goodwill 900
Accumulated depreciation:
– Buildings 270
– Equipment 228
– Vehicles 396
Inventory at April 1, 2013 321
Trade receivables and payables 549 351
Allowance for receivables 24
Bank balances 171
Current taxation 18
Ordinary shares of N1 each 600
Retained earnings at April 1, 2013 1,509
Revenue 4,296
Purchases 1,464
Directors’ fees 450
Wages and salaries 828
General distribution costs 303
General administrative expenses 558
Dividend paid 60
Rent received 90
Disposal of vehicle 30
Total 7,983 7,983

Additional information:

  1. The company’s non-depreciable land was valued at ₦900,000 on March 31, 2014, and this valuation is to be incorporated into the accounts.
  2. Depreciation policy:
    • Building: 4% p.a. (straight line)
    • Equipment: 40% p.a. (reducing balance)
    • Vehicles: 25% p.a. (straight line) In all cases, a full year’s depreciation is charged in the year of disposal.
  3. On February 1, 2014, a vehicle used entirely for administrative purposes was sold for ₦30,000 (cost ₦132,000). No other entries were made.
  4. Depreciation is apportioned as follows:
    • Buildings: 50% distribution, 50% administrative
    • Equipment: 25% distribution, 75% administrative
    • Vehicles: 70% distribution, 30% administrative
  5. Inventory at March 31, 2014, is valued at ₦357,000.
  6. Trade receivables include a debt of ₦24,000 to be written off. The allowance for receivables is to be adjusted to 4% of receivables after the write-off.
  7. Current tax for the year ended March 31, 2013, was over-estimated by ₦18,000. Current tax for 2014 is estimated at ₦90,000.
  8. One-quarter of wages and salaries was paid to distribution staff and the remaining three-quarters to administrative staff.
  9. General administrative expenses include bank overdraft interest of ₦27,000.

Required:
Prepare a statement of profit or loss and other comprehensive income for the year ended March 31, 2014.

 

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  • 30 Marks

FR – Nov 2015 – L2 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare consolidated financial statements for Hapu Plc and Sege Plc for the year ended December 31, 2014.

Statement of financial position as at December 31, 2014

Hapu Plc (₦’000) Sege Plc (₦’000)
Assets
Non-current assets:
Property, plant, and equipment 32,000 25,000
Investments 33,500 –
Total non-current assets 65,500 25,000
Current assets
Cash at bank and in hand 9,500 2,000
Trade receivables 20,000 8,000
Inventory 30,000 18,000
Total current assets 125,000 53,000
Equity and liabilities
Share capital 40,000 10,000
Share premium 6,500 –
Retained earnings 55,000 37,000
Total equity 101,500 47,000
Current liabilities 23,500 6,000
Total equity and liabilities 125,000 53,000

Statement of profit or loss for the year ended December 31, 2014

Hapu Plc (₦’000) Sege Plc (₦’000)
Revenue 125,000 117,000
Cost of sales (65,000) (64,000)
Gross profit 60,000 53,000
Distribution costs (21,000) (14,000)
Administrative expenses (14,000) (8,000)
Profit before taxation 25,000 31,000
Income tax expense (10,000) (9,000)
Profit for the year 15,000 22,000

Statement of changes in equity (extract) for the year ended December 31, 2014

Hapu Plc (₦’000) Sege Plc (₦’000)
Retained earnings brought forward 40,000 15,000
Retained profit for the year 15,000 22,000
Retained earnings carried forward 55,000 37,000

Additional Information:

  1. Hapu Plc owns 80% of Sege’s shares, purchased in 2011 for ₦20.5 million when Sege’s retained earnings stood at ₦7 million.
  2. Included in Sege’s inventory as of December 31, 2014, were goods purchased from Hapu for ₦3.9 million, with a 30% profit margin on cost. Total sales from Hapu to Sege amounted to ₦6 million.
  3. Hapu Plc and Sege Plc proposed dividends of ₦2 million and ₦2.5 million respectively, not yet accounted for.
  4. Goodwill impairment tests indicate no impairment in accordance with IFRS 3 and IAS 36.

Required:
Prepare the consolidated statement of profit or loss and the consolidated statement of financial position for Hapu Plc and Sege Plc as at December 31, 2014.

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  • 12 Marks

FR – Nov 2019 – L2 – Q1c – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain the factors required for selecting and applying accounting policies per IAS 8, and identify alternative policies for inventory and depreciation.

c. State the main factors that IAS 8 requires management of a company to consider in selecting and applying accounting policies in the absence of any IFRS and identify the alternative accounting policies on the following items in the financial statements:

i. Inventories
ii. Depreciation

(12 Marks)

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  • 1 Marks

FA – May 2023 – L1 – SA – Q14 – Recording Financial Transactions

Calculating the cost of sales based on the opening inventory, closing inventory, and mark-up.

14. The following information relates to Phoenix and Co:

N
Opening inventory 125,000
Closing inventory 96,000
Sales 8,913,300

Mark-up is 10%. Determine the cost of sales for the period.

A. N7,002,970

B. N8,050,970

C. N8,074,000

D. N8,103,000

E. N8,132,000

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  • 20 Marks

FR – March 2023 – L2 – Q3 – Preparation of Financial Statements

Prepare the statement of profit or loss and financial position using the given trial balance and adjustments.

Kinbuka Ltd has been in operation for the past five years. As a Public Listed Entity, the company uses full IFRSs in preparing its financial statements. Management of the company is preparing financial statements for the year ended 31 December 2021, and has produced the following trial balance for the period.

GH¢ GH¢
Revenue 1,171,000
Inventories (31/12/2020) 80,000
Purchases 543,000
Administrative expenses 180,000
Marketing & distribution expenses 55,000
Non-current assets (cost)-31/12/2020: Note (ii)
Furniture & fittings 88,000
Motor vehicles 180,000
Office equipment 30,000
Intangible assets 50,000
Accumulated depreciation -31/12/2020: Note (ii)
Furniture & fittings 18,000
Motor vehicles 62,400
Office equipment 13,000
Intangible assets 6,000
Taxation account Note (iii) 28,000
Trade & other receivables 151,000
Trade payables 125,000
Deferred tax-31/12/2020 Note (iii) 21,000
13% GOG Bond Note (iv) 19,000
Interest income Note (iv) 2,600
Bank account Note (v) 283,000
Share Capital 200,000
Retained earnings 68,000

Additional Information:

    1. Inventories at 31 December 2021 were valued at GH¢65,000.
    2. On 1 November 2021, one of the company’s vehicles used in selling and distributing its finished goods was involved in an accident; the vehicle was badly damaged beyond repairs as a result of the accident. This vehicle was acquired by the company on 1 January 2019 for GH¢95,000. The company, however, has insured the vehicle and thus on 4 November 2021 wrote to the insurance company for the claim, to purchase a new vehicle. In response, the insurance company picked and assessed the damaged car, and on 8 January 2022 paid the company a claim of GH¢80,000. There were no other changes in non-current assets for the year ended 31 December 2021. Non-current assets are depreciated or amortised as follows:
      • Furniture & fittings: 20% of cost
      • Office equipment, motor vehicles, and intangible assets: 10% of cost
      • No depreciation is charged on non-current assets in the year of de-recognition. Depreciation or amortisation expense is charged to cost of sales.
    3. The taxation account represents the aggregate amount paid by the company as self-assessment tax on its estimated profit for the four quarters of the 2021 year of assessment. Kinbuka Ltd in the year 2021, had officers of the Ghana Revenue Authority (GRA) auditing its tax records for the 2019 and 2020 years of assessment. All the prior years before the 2019 year of assessment have already been audited by GRA. The audit report of GRA received and agreed by Kinbuka Ltd in November 2021 revealed the following:
      • Year of assessment:
        • 2019: Current tax provided: GH¢45,000; Tax liability from the audit: GH¢43,000.
        • 2020: Current tax provided: GH¢57,800; Tax liability from the audit: GH¢67,600.

      The company paid in full the current tax provided for the years 2019 and 2020 in the first half of the years 2020 and 2021, respectively. However, the differences arising from the tax audit have not been provided for in the above balances and are yet to be settled by the company. Current tax expense and an increase in deferred tax liability for the year ended 31 December 2021 have been estimated at GH¢35,300 and GH¢3,750, respectively.

    4. As part of cash flow management, the company at the beginning of the current year, purchased a 13%, GH¢20,000 5-year bond at a price of GH¢19,000, incurring a brokerage fee of 2% of the par value. The bond will be redeemed at a premium of 5% over its par value. The brokerage fee paid is included in the administrative expenses. The business model of Kinbuka Ltd in relation to this bond is to hold it till maturity while availing itself to sell when there is a good opportunity to do so. The effective interest rate of the bond is 15% and its fair value at 31 December 2021 is GH¢21,000.
    5. The bank account represents the cash book balance as at 31 December 2021. The bank statement, however, reveals a balance of GH¢353,000 as at this date. There are only two reconciling differences between the two figures:
      • Cheques recorded at the credit side of the cash book but yet to be presented to the bank for payment amount to GH¢72,000.
      • Bank charges yet to be recorded in the cash book. All bank charges are classified as administrative expenses.

Required:
Prepare the Statement of Profit or Loss and Other Comprehensive Income of Kinbuka Ltd for the year ended 31 December 2021 and the Statement of Financial Position as at that date. Show clearly all relevant workings.

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  • 5 Marks

FR – Nov 2023 – L2 – Q5b – Financial Reporting Standards and Their Applications

Explain the accounting treatment of an event after the reporting period for a specific type of inventory

Kaime Ltd (Kaime) deals in cosmetics and make-up manufacturing and with year-end 31
December 2022. Its date of authorization of financial statements for issue was 9 February 2023 and the annual general meeting is scheduled on 8 March 2023. The following event occurred:
A particular type of inventory held by Kaime at a different location was recorded at its cost of GH¢598,000 at 31 December 2022 in the statement of financial position. The entity sold 70% of this inventory for GH¢364,000 on 15 January 2023, incurring a commission expense of 15% of the selling price of the inventory. The remaining 30% of the inventory are estimated to be realised at cost.

Required:
In accordance with IAS 10: Events after the Reporting Period, explain the appropriate accounting treatment of the event in the financial statements of Kaime for the year ended 31 December 2022

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  • 1 Marks

FA – Mar/July 2020 – L1 – SA – Q16 – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS

Accounting standard for recognizing newly constructed buildings

Oladiya ventures is in the business of real estate and property management. In the current year, the business constructed several buildings which have been placed for sale.

Which of the following standards will be appropriate for the recognition of the newly constructed buildings?
A. IAS2 – Inventory
B. IAS16 – Property, Plant and Equipment
C. IAS40 – Investment Property
D. IAS37 – Provision, Contingent Liability and Contingent Asset
E. IFRS 15 – Revenue from Contract with Customers

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  • 20 Marks

AA – Nov 2019 – L2 – Q3 – Audit and Assurance Evidence

Discusses the audit objectives, sources of evidence for inventory audit, and why stocks present high audit risk.

The information in the financial statements of your client, Honesty Company Limited, represents claims by management in relation to its responsibility to prepare financial statements that give a true and fair view of the company’s state of affairs and results of operations for the year under review. These claims are referred to as financial statement assertions.

Required:
a) Outline the audit objectives for the audit of stock (inventories) in the financial statements. Your answer should relate to the financial statement assertions. (8 marks)

b) Discuss FOUR (4) sources from which evidence can be obtained to confirm the quantities and value of stocks. (8 marks)

c) Explain why stocks present high audit risk. (4 marks)

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  • 20 Marks

AA – Mar 2023 – L2 – Q3 – Audit and Assurance Evidence

Explain why property, plant and equipment, trade receivables, and inventory were selected for further investigation.

Maggie Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for 2021, prior to the final audit planning meeting with the financial controller.

Draft Statement of Financial Position (Extracts):

The manager has reviewed these extracts and has identified three financial statement headings that require further investigation: property, plant, and equipment, trade receivables, and inventory. He has also calculated certain accounting ratios.

Required:
a) Explain why the manager has selected these three headings for further investigation.

b) Detail and explain the further information that the manager should request from the financial controller at the final audit planning meeting to clarify the situation with regards to the three financial statement headings.

 

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  • 8 Marks

AA – Nov 2015 – L2 – Q1b – Audit and Assurance Evidence, Completion Procedures and Reporting

This question covers the audit procedures to confirm inventory existence, completeness, and valuation at the year-end.

Describe the audit procedures that the auditor should perform at the year-end to confirm each of the following:
i. The existence of inventory.
ii. The completeness of inventory.
iii. The valuation of inventory.
(8 marks)

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  • 4 Marks

AA – May 2020 – L2 – Q2b – Types of Audit and Assurance Engagements

Describe audit procedures to obtain sufficient evidence regarding inventory.

ISA 501 – Audit Evidence – Specific Considerations for Selected Items deals with three specific items that may be contained within a set of general-purpose financial statements and for which the auditor may need to obtain sufficient appropriate audit evidence. It deals with specific considerations for inventory, litigation and claims, and segment information.

Required:
i) What should an auditor do to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory where inventory is material to the financial statements? (2 marks)

ii) What should an auditor do when physical inventory counting is conducted on a date other than the date of the financial statements? (2 marks)

 

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  • 6 Marks

AA – May 2018 – L2 – Q4b – Audit and Assurance Evidence

Identifies key financial statement assertions for year-end account balances and describes substantive procedures related to inventory.

b)
i) Identify and explain two financial statement assertions relevant to account balances at the year-end. (2 marks)
ii) For each identified assertion, describe a substantive procedure relevant to the audit of year-end inventory.

(4 marks)

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  • 20 Marks

AA – Nov 2018 – L2 – Q3a, b & c – Audit and Assurance Risk Environment

Identifies audit risks at International Training Center and outlines appropriate auditor responses.

International Training Center (ITC) is a large company limited by shares that operates a network of teaching centers in countries across West Africa. The Company was incorporated under the requirements of the Companies Act, 1963 (Act 179), on 19 January 1990 and domiciled in Ghana. Students who register with the Center pay 30% during initial registration and the remaining 70% over the course period. You are the senior Associate of Add Consult. ITC is a new client, and you are currently planning the audit with the audit manager to audit the company for the year ended 31 December 2017.

You have been provided with the following planning notes from the audit partner following his meeting with the Finance Director.

  • ITC purchases stationery from a supplier in China, and these goods are shipped to the company’s central warehouse. The goods are usually in transit for a fortnight, and the company correctly records the goods when received. ITC does not undertake a year-end inventory count but carries out monthly continuous (perpetual) inventory counts, and any errors identified are adjusted in the inventory system for that month.
  • During the year, the directors of the Company have each been paid a significant bonus, and they have included this in wages and salaries expenses. Separate disclosure of the bonus is required by the Companies Act.
  • ITC has a policy of revaluing its land and buildings, and this year has updated the valuations of all land and buildings.
  • During the year, the company introduced a bonus-based scheme on sales for its salespersons. The bonus target was based on increasing the number of students signing up for 6-month courses by the school for individuals running accountancy examinations. This has been successful, and revenue has increased by 25%, especially in the last few months of the year. The level of receivables is considerably higher than last year, and there are concerns about the creditworthiness of some students.

Required:
a. Describe FIVE (5) audit risks, and explain the auditor’s response to each risk, in planning the audit of International Training Center. (10 marks)

b. Identify FIVE (5) audit procedures Add Consult should perform in order to place reliance on the continuous (perpetual) counts for year-end inventory. (5 marks)

c. Describe substantive procedures Add Consult should perform to confirm the directors’ bonus payments included in the financial statements. (5 marks)

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