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Hi, there is a problem relating to question given below about the change in accounting policy that can effect net profit …. as according to question in Ist year the closing inventory value as per fifo was 15m and 13.4m as per avco , so Ist year profit will be reduce to (1.6m) because closing inventory vaue is reduced to 13.4m which causes CGS to increase by same amount….
and in 2nd year 30/sep/2013 the closing inventory value as per fifo was 20m and 18m as per avco ,so 2nd year profit will reduce to (2m) …..Now as the both figure are comparable so the net profit would reduce to (.4m or 400000) 1.6-2……does my understanding is right or i am thinking the wrong way???QUESTION:Most of Tunshill’s competitors value their inventory using the average cost (AVCO) basis, whereas Tunshill
uses the first in first out (FIFO) basis. The value of Tunshill’s inventory at 30 September 20X3 (on the FIFO
basis) is $20 million, however on the AVCO basis it would be valued at $18 million. By adopting the same
method (AVCO) as its competitors, the assistant accountant says the company would improve its profit for
the year ended 30 September 20X3 by $2 million. Tunshill’s inventory at 30 September 20X2 was reported as
$15 million, however on the AVCO basis it would have been reported as $13.4 million.REQUIRNMENT>What will be the effect of the change in profits for the year ended 30 September 20X3?
( CORRECT ANSWER AS PER BOOK IS 400000 REDUCING)Hi,
20X2 – lower closing inventory under AVCO would mean lower asset and lower profit in 20X2
20X3 – opening inventory would now be lower and so a higher profit of $1.6 million as the SPL debit balance would be lower. The closing inventory is lower by $2 million and so a lower profit. If you net the $2 million reduction from the $1.4m increase then the net is $0.4 million reduction.
It’s a pretty complicated question so don’t worry too much if you’ve found it tough.
Thanks
i absolutely got it sir ….but what i studied in the standard ias 8 ,if there is change in policy then we have to change values retrospectively for different years say in above case 20×2/20×3 and then compare both values for we have got better or worse ……BUT
In above case all values are restate and accumulate in single year then compare the figures of same year (20×3) ….???Hi,
You need to appreciate how inventory works and that the change made to last year’s closing inventory figure will impact this year’s opening inventory figure on the statement of profit or loss. This is a special case and wouldn’t impact other scenarios, for example where there is a fraud and the prior year figures need to be updated only.
Thanks
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