FINANCIAL REPORTING – Page 9

FR – L2 – Q18 – Inventories

Calculate the value of raw materials and finished goods inventories for Tamasi Manufacturing at 31 Dec 20X5 per IAS 2 using FIFO.

Question

Tamasi Manufacturing was formed on 1 January 20X5. The entity manufactures and sells a single product and values it on a first-in, first-out basis.
One tonne of raw material is processed into one tonne of finished goods.
The following details relate to 20X5.

Purchases of raw materials
Purchases:
Price: GH¢100,000 per tonne on 1 January, increasing to GH¢150,000 per tonne on 1 July
Import duties: GH¢10,000 per tonne
Transport from docks to factory: GH¢20,000 per tonne

Production costs
Production capacity: 1,000 tonnes of raw materials per week
Variable costs: GH¢25,000 per tonne
Fixed costs: GH¢30,000,000 per week
Sales details
Selling price: GH¢240,000 per tonne
Delivery costs to customers: GH¢8,000 per tonne
Selling costs: GH¢4,000 per tonne

Inventories at 31 December 20X5
Raw materials: 2,000 tonnes
Finished goods: 2,000 tonnes

There is a ready market for raw materials and the NRV of the raw materials is higher than its cost.

Required
Calculate and disclose the value of inventories at 31 December 20X5 in accordance with IAS 2.

Answer

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Tags: Cost Valuation, FIFO, IAS 2, Inventories, Manufacturing, Net Realisable Value
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q17 – Inventories

Explain IAS 2 requirements for inventory measurement and state disclosure requirements for Kintampo Limited.

Question

MEASUREMENT OF INVENTORIES

IAS 2 inventories prescribes the accounting treatment for inventories under the historical cost system.

Required

(a) Explain briefly how IAS 2 requires the following to be dealt with.

(i) Fixed production overheads.

(ii) The determination of the lower of cost and net realisable value.

(iii) The identification of costs when there are large numbers of items which are ordinarily interchangeable.

(b) State four disclosure requirements of IAS 2 in respect of inventories.

Answer

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Tags: Cost Measurement, Disclosure Requirements, FIFO, IAS 2, Inventories, Net Realisable Value
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Title: FR – L2 – Q16 – Inventories

Calculate inventory value at 31 Dec using FIFO, NRV, and IAS 2 for Bolga Limited.

Question

Bolga Limited has the following purchases and sales of a particular product line.

	Units purchased	Purchase price per unit	Units sold	Selling price per unit
		GH₵’000		GH₵’000
2 December	100	500	60	530
16 December	60	503	80	528
30 December	70	506	50	524
14 January	50	509	70	524
28 January	80	512	50	520
11 February	40	515	40	520

At 31 December the physical inventory was 150 units. The cost of inventories is determined on a FIFO basis. Selling and distribution costs amount to 5% of selling price and general administration expenses amount to 7% of selling price.

Required
(a) State any three reasons why the net realisable value of inventory may be less than cost.

(b) Calculate to the nearest GH₵’000 the value of inventory at 31 December
(i) at cost
(ii) at net realisable value
(iii) at the amount to be included in the financial statements in accordance with IAS 2

Answer

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Tags: Cost Valuation, FIFO, Financial Statements, IAS 2, Inventories, Net Realisable Value
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q15 – Financial Reporting Standards

Calculate revenue, costs, and financial statement balances for four construction contracts using cost proportion method.

Question

On 31 March 20X9, Annabel Ltd had four construction contracts in progress. Details are set out below.

	Contract A	Contract B	Contract C	Contract D
	GH¢000	GH¢000	GH¢000	GH¢000
Contract price	1,850	750	960	800
Costs to date	1,490	590	405	120
Estimated future costs		25	600	480
Revenue taken in earlier years	990	100
Cost of sales recognised in earlier years	800	100
Progress billings to date	1,850	690	650	100
Cash received to date	1,850	600	600	100

Contract A was completed during the year.
Contract C commenced on 1 May 20X8.
Contract D commenced on 1 January 20X9. It is not considered possible on 31 March 20X9 to assess the outcome of Contract D with any certainty.
Annabel Ltd recognises revenue based on the proportion of costs incurred to date to expected total costs.

Required:
Show the amounts that would be recognised and presented for each contract in the financial statements of Annabel Ltd for the year ended 31 March 20X9 and show the total balances in those financial statements. Work to the nearest GH¢000.

Answer

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Tags: Construction Contracts, Contract Assets, Contract Liabilities, Financial Statements, IFRS 15, Progress Billings, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q14 – Financial Reporting Standards and Their Applications

Discuss accounting for a repurchase agreement and consignment arrangement for Accra Healthcare Manufacturing Limited per IFRS standards.

Question

The following transactions took place at Accra Healthcare Manufacturing Limited in the year ended 31 March 20X9.

(1) On 1 January Accra Healthcare Manufacturing Limited sold goods to a bank for GH₵18m cash and agreed to repurchase the personally identifiable information repurchase the goods for GH₵20m cash on 31 December 20X9.

(2) On 31 March Accra Healthcare Manufacturing Limited consigned several motorised mobility aids to independent medical salespeople for sale to third parties. The sales price to the dealer is Accra Healthcare Manufacturing Limited’s list price at the date of sale to third parties. If a mobility aid is unsold after six months, the medical rep has a right to return it to Accra Healthcare Manufacturing Limited.

Required
Discuss how the above transactions should be accounted for in the financial statements of Accra Healthcare Manufacturing Limited for the year ended 31 March 20X9.

Answer

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Tags: Consignment Arrangements, Financing Transactions, IFRS 15, Repurchase Agreements, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q13 – Revenue Recognition

Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

Question

13 Davies Ltd

Davies Ltd manufactures and sells machines and has a 31 December year-end.

Customers are required to pay a deposit of 10% on order. The remaining 90% is paid on delivery.

Machines are delivered to customers by a third party. Within one week after delivery, Davies Ltd’s employees install the machines on customers’ premises. The installation required is not complex and is capable of being performed by several alternative service providers. Installation costs 1% of the transaction price.

A fee for a three year servicing contract amounting to 6% of the transaction price, are included in the final invoice.

Required

(a) Explain how performance obligations are identified when deciding how to account for a contract to supply goods and services in accordance with IFRS 15.

(b) Identify and explain the performance obligations that should be identified in the above contract.

Construct journals for the year end to 31 December to account for a sale of a single machine with a selling price of GH¢1,000,000 in each of the following circumstances.

(d) Circumstance 2: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 10 January.

(e) Circumstance 3: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 30 December.

Answer

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Tags: Accounting Standards, Financial Reporting, IFRS 15, Performance Obligations, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q12 – Revenue Recognition

State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

Question

12 SALE OF GOODS AND LEISURE FACILITIES
“Revenue is income arising in the course of an entity’s ordinary activities.”
IFRS 15 sets out principles to be applied in order to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

Required
(a) State the core principle described by IFRS 15 in the recognition of revenue and list the five steps to be followed in applying this core principle.

(b) Zest Ltd runs a health club which provides sports and leisure facilities. It charges a fixed annual subscription, payable in advance, which entitles members to use most of the facilities (e.g. gym, swimming pool). Additional fees are payable for specific activities (e.g. sauna, squash courts) as used.
Explain in detail how Zest Ltd should recognise revenue from membership subscriptions and additional activities.

Answer

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Tags: Accounting Standards, Financial Reporting, Health Club, IFRS 15, Performance Obligations, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Title: FR – L2 – Q11 – Accounting Policies

Define accounting policies as per IAS 8 requirements.

Question

(a) Define accounting policies.

(b) State the main factors that IAS 8 requires management to consider in selecting and applying accounting policies in the absence of any IFRS Accounting Standard.

(i) Property, plant, and equipment

(ii) Inventories

(iii) Depreciation

Answer

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Tags: Accounting policies, Depreciation, IFRS, Inventories, Property Plant Equipment
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q10 – Accounting policies and changes in estimates

Show how a change in accounting policy for borrowing costs is reflected in the statement of changes in equity for 20X4 per IAS 8.

Question

AccraTech Company has previously written off any expenditure on borrowing costs in the period in which it was incurred.
The company has appointed new auditors this year. They have expressed the view that the previous recognition of borrowing costs in the statement of profit or loss was in error. The company has decided to correct the error retrospectively in accordance with IAS 8.
The financial statements for 20X3 and the 20X4 draft financial statements, both reflecting the old policy, show the following:

Statement of changes in equity (extract)

20X3	20X4
Retained earnings	Retained earnings
GH₵000	GH₵000
22,500	23,950
3,200	4,712
(1,750)	(2,500)
23,950	26,162

Opening balance
Profit after tax for the period
Dividends paid
Closing balance

Borrowing costs written off were GH₵500,000 in 20X3 and GH₵600,000 in 20X4.
The directors have calculated that borrowing costs, net of depreciation which should have been included in property, plant and equipment had the correct policy been applied, are as follows:

GH₵000
At 30 December 20X2
At 31 December 20X3
At 31 December 20X4

Had the correct policy been in force depreciation of GH₵450,000 would have been charged in 20X3 and GH₵870,000 in 20X4.

Required
Show how the change in accounting policy must be reflected in the statement of changes in equity for the year ended 31 December 20X4. Work to the nearest GH₵000.

Answer

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Tags: Accounting policies, Borrowing Costs, Equity changes, Financial Statements, IAS 8, Prior period adjustment, Retained Earnings
Level: Level 2

Topic: Accounting policies and changes in estimates

FR – L2 – Q9 – Professional and Ethical Issues in Financial Reporting

Identify ethical issues in two cases involving financial reporting decisions by ICAG accountants

Question

TWO CASES

Case 1
Kofi Mensah has been on a two-year study sabbatical in Canada and this is his first job on returning to work. Kofi Mensah qualified as an ICAG chartered accountant just before his sabbatical. He worked in a medium-sized practice with wide experience of clients in the mining, manufacturing, and agricultural sectors.
Volta Assurance Limited is a subsidiary of a listed group involved in financial services. The financial controller of Volta Assurance Limited has been on long-term sick leave. Kofi Mensah has been offered an appointment as temporary financial controller three months before the 31 December 20X9 year-end.
Kofi Mensah would be responsible for preparing the financial statements for the year ended 31 December 20X9. Key areas of the financial statements include lessor accounting, financial instruments, and insurance contracts.
During his interview for the post, the group finance director told Kofi Mensah that the group is looking for a strong financial position and performance from the subsidiary and that if Kofi Mensah helps deliver it, he is sure to obtain a permanent post in the group.

Case 2
Kwame Osei is an ICAG Chartered Accountant and works as a financial accountant working for Kumasi Builders plc.
Kumasi Builders plc is about to finalise its financial statements for the year ended 31 December 20X9 and will release its results in two days’ time.
One of Kwame Osei’s tasks during the frantic year-end work was to perform an impairment review on certain assets owned by the company. There were indications of impairment, but Kwame Osei’s calculation of recoverable amount showed that no assets were impaired.
Kwame Osei has just read an article on spreadsheet error. This led him to review the spreadsheets that he built to perform the recoverable amount calculations, and he has found an error in the logic. This error, if corrected, would have led to the company recognising a material impairment loss.
The loss, if recognised, would lead to the profit figure falling below the level at which Kwame Osei’s bonus is triggered. He is also concerned that his mistake will compromise his future promotion prospects.

Required
Identify and explain the ethical issues arising in the above cases.

Answer

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Tags: Ethics, Financial Reporting, Financial Statements, ICAG, Integrity, Intimidation Threat, Objectivity, Professional Competence, Professional conduct, Self-Interest Threat
Level: Level 2

Topic: Professional and Ethical Issues in Financial Reporting

Subject (SQ): FINANCIAL REPORTING

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FR – L2 – Q18 – Inventories

Calculate the value of raw materials and finished goods inventories for Tamasi Manufacturing at 31 Dec 20X5 per IAS 2 using FIFO.

FR – L2 – Q17 – Inventories

Explain IAS 2 requirements for inventory measurement and state disclosure requirements for Kintampo Limited.

Title: FR – L2 – Q16 – Inventories

Calculate inventory value at 31 Dec using FIFO, NRV, and IAS 2 for Bolga Limited.

FR – L2 – Q15 – Financial Reporting Standards

Calculate revenue, costs, and financial statement balances for four construction contracts using cost proportion method.

FR – L2 – Q14 – Financial Reporting Standards and Their Applications

Discuss accounting for a repurchase agreement and consignment arrangement for Accra Healthcare Manufacturing Limited per IFRS standards.

FR – L2 – Q13 – Revenue Recognition

Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

FR – L2 – Q12 – Revenue Recognition

State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

Title: FR – L2 – Q11 – Accounting Policies

Define accounting policies as per IAS 8 requirements.

FR – L2 – Q10 – Accounting policies and changes in estimates

Show how a change in accounting policy for borrowing costs is reflected in the statement of changes in equity for 20X4 per IAS 8.

FR – L2 – Q9 – Professional and Ethical Issues in Financial Reporting

Identify ethical issues in two cases involving financial reporting decisions by ICAG accountants

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Calculate the value of raw materials and finished goods inventories for Tamasi Manufacturing at 31 Dec 20X5 per IAS 2 using FIFO.

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Explain IAS 2 requirements for inventory measurement and state disclosure requirements for Kintampo Limited.

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Calculate inventory value at 31 Dec using FIFO, NRV, and IAS 2 for Bolga Limited.

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Calculate revenue, costs, and financial statement balances for four construction contracts using cost proportion method.

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Discuss accounting for a repurchase agreement and consignment arrangement for Accra Healthcare Manufacturing Limited per IFRS standards.

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Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

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State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

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Define accounting policies as per IAS 8 requirements.

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Show how a change in accounting policy for borrowing costs is reflected in the statement of changes in equity for 20X4 per IAS 8.

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Identify ethical issues in two cases involving financial reporting decisions by ICAG accountants

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