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Box has used first-in-first-out to measure its inventory for many years. On 1 October 20X4 Box moved to using average cost. This
increased the inventory value at that date by $200,000. Which of the following is NOT the correct accounting treatment for the financial statements for the year ending
30 September 20X5?A
Increase opening retained earnings in the statement of changes in equity by $200,000B
Increase the prior year comparative statement of financial position inventory by $200,000C
Increase the cost of sales for 20X5 by $200,000D
Decrease the cost of sales for 20X5 by $200,000
Reduce the profits in the prior year comparative statement of profit or loss by $200,000The correct answer is d
In my opinion since the inventory value has increased and it is a case of change in accounting policy, Effect should be taken retrospectively and there for increasing the closing inventory for the year ended 30 September 20X4 And as the closing inventory increases profits also increase
Thus most Accurate option according to me is B
Thank you in advance :’)
Hi,
Changes in accounting policy in relation to inventory are always tricky, especially when it is asking you which is NOT the correct accounting treatment.
The answer is correct as being D because when we increase the inventory at 1 October 20X4 we would be increasing the opening inventory in the cost of sales. An increase to opening inventory is an additional cost as it is a debit balance, hence we would be increasing the cost of sale for the year-ended 30 September 20X5.
Answer B is the correct accounting treatment as we need to restate the comparatives when adjusting the opening inventory, which would have been the prior year closing inventory.
Hope this helps clear it up.
Thanks
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