Financial Reporting Analysis

Question 1

FIFO Method

date purchases issued balance total
January

April

 

June

 

 

September

40 units @ £30

20 units @£44

 

_

 

 

_

  _

_

 

30 units @ £30

 

 

10 units @£30

4 units@ £44

40 units @£30

20 units @£44

 

10units @£30

20 units@ £44

 

16 units @£44

1200

880

2080

 

1100

 

704 value of closing stock

 

LIFO METHOD

date purchases issued balance total
January

April

 

June

 

 

September

40 units @ £30

20 units @£44

 

_

 

 

_

  _

_

 

20 units @ £44

10 units @£30

 

14 units@ £30

40 units @£30

20 units @£44

 

30 units@ £30

 

 

16 units @£30

 

1200

880

2080

900

 

 

480 value of closing stock

 

AVCO Method

date purchases issued Average cost No. of units total
January

April

 

June

 

September

40 units @ £30

20 units @£44

 

_

 

_

_

_

 

30units @£37

 

14 units@£37

30

37

 

37

 

37

40

60

 

30

 

16

1200

2200

 

1110

 

592 value of closing stock

 

Cost of goods sold

+2880

  1. statement of income of top limited using FIFO inventory valuation method

Revenues                                                                        85000

Cost of sales

Opening stock                                 6500

Purchases                                   48300

Cost of goods available for sale    54800

Less closing stock

GP                                                                          38400

Other operating expenses                                     

Profit from operations                                           30400

Investment income finance cost                               

Profit before tax                                                        21400

Income tax expenses

Net profit for the period                                      14400

 

Workings:

Cost of sales= purchases+ opening stock-closing stock

48000=p+7000-7300

Purchases=48000+300=48300

 

Using the FIFO stock valuation method provides a higher Gross Profit.

Q (2.)

  • definition of property plant and equipment   (5 marks)

Property plant and equipment (PP&E) is a class of non-current assets shown in the balance sheet of a business entity and crucial role in the financial planning and analysis of the organizations operations and future expenses and mostly regarding capital expenses (La Torre et al, 2018). They are maintained as fixed asset accounts and are generally not liquid (corporate finance institutions) included in PP&E are land, buildings, leasehold improvements, equipment, furniture, fixtures, delivery trucks, automobiles among others and these are owned by the company (Stolowy and Paugam, 2018).

(b) Two methods of measuring PP&E after the initial recognition

  • Cost model – whereby assets are carried at cost less accumulated depreciation and impairment.
  • Revaluation model – the assets are recognized at a revalued amount which is the fair value of the date of revaluation.

(c) What are elements that comprise the cost of an item of property, plant and equipment?

  1. Purchase price – these includes import duty where applicable and refundable purchase taxes after deducting trade discounts and rebates.
  2. Costs which are directly associated with transporting the asset to the business location and condition necessary to bring the asset to a capable operating in a manner intended by management.
  • The initial cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurred either when the item is acquired or as a consequence of having used the item during a particular period for purpose other than to produce inventorial during this period (Stolowy and Paugam, 2018).
  1. Installation costs.

(d) Investment property

This is the property held or purchased with the aim of earning return on investment either through rental income future re-sell of property or both. These could be land held for long term capital appreciation, building leased out under an operating lease, unoccupied building maintained to be leased out under an operating lease. Or even property being constructed to be used at future date as an investment property. Investment properties generate some form of income through dividends interest rents and royalties (La Torre et al, 2018).

(e). circumstances under which investment is recognized as investment property

  1. When land is held for order to have a long-term increase in value(appreciation)
  2. When land is owned for undecided use in the future
  • When the property is being constructed or developed for use in the future as an investment property
  1. When unoccupied building structure is held with the aim of leasing it out and an operating lease.
  2. When a building is leased out under an operating lease arrangement.

 

Q.3  (a) Define period covered by IAS 10.

IAS 10 covers a period when an organization/business entity is required to adjust its financial statements to capture events that occurred after the reporting period. It describes some disclosures which entities ought to make concerning the date the financial statement were authorized for issue and about events after the reporting period. These are events that occur between the end of reporting period and the date the financial statements are authorized to be issued (Roychowdhury, Shroff and Verdi, 2019).

(b) When should the financial statement be adjusted.

Financial statements should be adjusted at the end of the accounting period to ensure that assets and liabilities are reported at the actual amounts to avoid understatements of the amounts. This ensures that revenues and expenses are reported in the period to which they relate. Companies wait until the end of the accounting period in order to adjust their accounts since daily adjustments might be costly and time consuming (Roychowdhury, Shroff and Verdi, 2019).

(c) Why should non-adjusting activities be disclosed

Non-adjusting events are indicative of conditions arising after the end of a reporting period. These events ought to be disclosed if they are of crucial importance such that their non-disclosure would interfere with the ability of the users to make sound evaluations and decisions about the company. The kind of disclosure required is the nature of the events and the estimate of the financial effects (Roychowdhury, Shroff and Verdi, 2019).

(d) Out of the claim of $50000, $40000 was for goods due for delivery before the yearend under IAS10. This should be treated as an adjusting activity and should be adjusted on the financial statement before the final authorization is done thus because its non-disclosure would impacts the users of the financial statements in terms of the decisions made (Flower and Ebbers, 2018).

(e) Matters to be considered in making decisions under IAS 10

Going concern is one of the fundamental assumptions in accounting on basis of which financial statements are prepared. The management should assess whether going concern assumption is appropriate. They should also consider the liquidity position of the company to know whether to bring back the business in operation by borrowing (Flower and Ebbers, 2018). They should also determine whether the organization was profitable enough to credit acquiring finances elsewhere to establish it. They should consider also aggressive growth strategies that they may employ to go back to business,

(f) This is a non adjusting event since it occurred after the end of the financial period and should be reported in the preceding year. They should record it under the profit and loss account of the entity in the preceding year as a trading loss arising from sale of goods with the wrong ingredients (Flower and Ebbers, 2018).

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