- 9 Marks
FA – L1 – Q46 – Inventory
Question
Aba Medical Supplies
Inventory
On 1 January 20Y0, Aba Medical Supplies held 300 units of an item of finished goods inventory. These were measured at a cost of GH¢ 22 each. During January 20Y0 three batches of finished goods were received into store from the production department, as follows:
| Date | Units received | Production cost per unit (GH¢) |
|---|---|---|
| 10-Jan | 400 | GH¢ 23 |
| 20-Jan | 400 | GH¢ 25 |
| 25-Jan | 400 | GH¢ 26 |
Goods sold out of the inventory during January 20Y0 were as follows:
| Date | Units sold | Sale price per unit (GH¢) |
|---|---|---|
| 14-Jan | 500 | GH¢ 31 |
| 21-Jan | 500 | GH¢ 33 |
| 28-Jan | 100 | GH¢ 32 |
Customer
The financial manager of Aba Medical Supplies is a qualified accountant. She is aware that one of the company’s customers, a private doctor, is struggling to pay his bill to the company. He has explained that this is due to a need to pay legal fees as a patient has brought an action for negligence against him. The financial manager has telephoned other medical supply companies and warned them not to sell goods to the doctor, explaining why. She has also advised a personal friend, that is one of the doctor’s patients, to look for a new doctor as this one has been negligent.
Required
(a) Compute the cost of sales and inventory at 31 January 20Y0, applying the following basis of inventory valuation:
(i) FIFO
(ii) Weighted Average Cost (Average is updated after every transaction).
(b) Explain why the actions of the finance manager do not reflect the requirements of the IESBA Code.
Answer
(a)
(i) FIFO
Cost of sales – issue
14-Jan: 300 units @ GH¢ 22 = 6,600
200 units @ GH¢ 23 = 4,600
Total = 11,200
21-Jan: 200 units @ GH¢ 23 = 4,600
300 units @ GH¢ 25 = 7,500
Total = 12,100
28-Jan: 100 units @ GH¢ 25 = 2,500
Total cost of sales = 11,200 + 12,100 + 2,500 = 25,800
Closing inventory
100 units @ GH¢ 25 = 2,500
400 units @ GH¢ 26 = 10,400
Total closing inventory = 12,900
(ii) Weighted Average Cost
| Date | Transaction | Units | Cost per unit (GH¢) | Total cost (GH¢) | Average cost (GH¢) |
|---|---|---|---|---|---|
| 1-Jan | Opening inventory | 300 | 22 | 6,600 | 22.00 |
| 10-Jan | Receipt | 400 | 23 | 9,200 | (6,600 + 9,200) / (300 + 400) = 22.57 |
| 14-Jan | Sale (500 units) | 200 | 22.57 | 4,514 | 22.57 |
| 20-Jan | Receipt | 400 | 25 | 10,000 | (4,514 + 10,000) / (200 + 400) = 24.19 |
| 21-Jan | Sale (500 units) | 100 | 24.19 | 2,419 | 24.19 |
| 25-Jan | Receipt | 400 | 26 | 10,400 | (2,419 + 10,400) / (100 + 400) = 25.64 |
| 28-Jan | Sale (100 units) | 400 | 25.64 | 2,564 | 25.64 |
Total cost of sales = 4,514 + 2,419 + 2,564 = 25,697
Closing inventory = 400 units @ GH¢ 25.64 = 10,256
(b)
The finance manager is aware that the doctor cannot pay his bill and why. She has obtained this information as a result of her position within the finance department of Aba Medical Supplies and should therefore treat it with confidentiality. Despite this, she has gone out of her way to inform other companies and a personal friend that the doctor has a negligence case against him. To share this information is unethical behaviour.
The finance manager’s professional behaviour is also called into question, as her conduct may discredit the accountancy profession.
- Topic: Inventory
- Uploader: Samuel Duah