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    • Avatar of John Moffat says

      You have not asked me for advice!!

      The exam will test the whole syllabus of Paper F3, and therefore you must work through all of the free lectures on here (together with the Course Notes that go with the lectures).

      You must also obtain a Revision/Exam Kit from one of the approved publishers. They contain lots of exam-standard questions to practice on, and practice is vital.

  1. avatar says

    Hi. I have a question when substracting 28k from revenue and cgs.
    I do understand why we are substracting 28k from revenue, but i dont get why we substract the same number from CGS. I dont understand why it isnt 20k (8k lesser, because of the profit)

    • Avatar of John Moffat says

      Hi Martynas

      Remember that they are two separate companies and will have produced their own accounts separately.
      If one company sells to the other for 28,000, the the selling company will have recorded sales of 28,000. The buying company will have paid 28,000 and will have recorded a purchase of 28,000.

      When we consolidate, we only want to show sales outside the group, and so we subtract 28,000 from the total sales (and you are happy with this).
      However, we only want to show purchase from outside the group, so since the buying company has recorded purchases of 28,000, we need to subtract 28,000 from the total purchases.

      If you are still unsure, then imagine this. X buys goods for 10,000, sells them to Y for 15,000, and Y sells them outside for 18,000.
      In their own accounts, X has sales of 15,000 and cost of 10,000, so has made a profit of 5,000. Y has sales of 18,000 and cost of 15,000, so has made a profit of 3,000.
      When we consolidate, the total sales are 15,000 + 18,000 – 15,000 = 18,000
      Total costs are 10,000 + 15,000 – 15,000 = 10,000
      Total profit = 18,000 – 10,000 = 8,000

      (The only time the profit element in the transfer is relevant is if any of the goods sold from X to Y are still in Y’s inventory at the year end – then we have a provision for unrealised profit to deal with. However that is covered in the next lecture and so I will not confuse things by going into it now).

  2. avatar says

    Dear John, just wanted to check if i have understood inter entity transactions as intended in the lectures:-

    (i)All inter entity transactions are excluded to reflect profits from only outside the group.In a way, it reduces the problem of double counting which arises due to consolidation

    (ii)Cost of sales and inventory are adjusted only if there are any unsold inventory. Adjustment is made by increasing the cost of sales equal to the amount of unrealized profit which reduces the retained earnings. Accordingly, inventory is reduced by an equal amount . Assets and liabilities should match since inventory and retained earnings are reduced by an equal amount.

  3. avatar says

    Dear Mr. Moffat, since the unrealized profit on inventory was recorded by the selling company, would it not be easier (and the same effect) if we subtracted the profit from the sales revenue than adding it to the cost of sales? Arithmetically, it’s the same but I’m just wondering if it could be any different?

    • Avatar of MikeLittle says

      Hi, although the end result would be arithmetically the same, your suggestion is not correct. The goods, when originally purchased, are in the buyer’s cost of sales (purchases) at say $10 and closing inventory at $10). The buyer sells for say $15 and the other group company includes $15 in its cost of sales (purchases) and closing inventory $15. So now it’s in revenue at $15 and in cost of sales at $10 (original purchase) and at $15 (intra-group sale / purchase) and in closing inventory at $15. To get to the correct position, we need to cancel the intra-group sale dollar for dollar. Thus we eliminate $15 from combined revenue and from combined cost of sales. That leaves us with +$10 in cost of sales (original purchase) and -$15 in cost of sales (closing inventory) To arrive at the correct position, we need to reduce that closing inventory by $5. Thus, we must ADD $5 to cost of sales and reduce combined closing inventory on the CSoFP.

      Clear?

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