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Hello sir..!
Could you kindly explain the following question for me.
On 31 May 20X0, Charmaine Co counted it’s closing inventory for the year ended 31 May 20X0. Its valuation at cost amounted to $459204. Several days later, the company realised that it had included inventory of $5130 which had been identified as faulty during the inventory count and has been returned to the supplier. Additionally, certain inventory items with a cost of $6700 were obsolete and only has a net realisable value of $6150.
What should the adjustments be to cost of sales and closing inventory in the financial statements for the year ended 31 May 20X0?
Cost of Sales (Choose one):
Increase by $5680
Reduce by $5680Closing Inventory (Choose one):
Increase by $5680
Reduce by $5680The provided answer with explanation is as follows:
Cost of Sales – Reduce by $5680
Closing Inventory – Reduce by $5680Adjustment required to closing inventory:
Faulty inventory returned to supplier (5130)
Write down to NRV for obsolete items (550)Net adjustment (5680)
Sir, I get the adjustment required to write down obsolete items to the lower amount (which is NRV in this case). So this would have reduced CLO INVENTORY and increased COST OF SALES by $550
Also, for the items returned to supplier, we would have reduced COST OF SALES (by deducting returns from purchases ) as well as CLOSING INVENTORY (because it has been returned to the supplier).
I don’t understand how they got the answer.
I don’t know where you found the question, but assuming that you have copied it all out correctly then the answer is completely wrong.
The closing inventory will certainly be reduced by 5,680. I can only assume that the answer has taken it that because the faulty goods had not been returned as at 31 May then the purchases figure is unchanged. As a result, if the inventory is reduced in the SOPL then the cost of sales will be increased by both of the adjustments and not reduced!!
However even that would strictly be wrong because the cost of what was actually sold during the year is not affected by either the obsolete items or the faulty goods.
The inventory in the SOFP will certainly reduce.
However the write down in the obsolete items should be charged separately against the gross profit. As far as the faulty goods are concerned, then as you have written both the purchases and the closing inventory should be reduced (and the payables in the SOFP). The cost of sales should not change.Thanks for your explanation sir.
This question is from FA Sep 23 – Aug 24 Practice Test No 3.
By charging the obsolete items seperately against gross profit, does it mean it is treated as IMPAIRMENT LOSS ?
You are welcome (if it is a practice test on the ACCA website then please let me know and I will report the error) 🙂
The obsolete items certainly reduce the profit (either by reducing the inventory and therefore increasing the sale, or – better – by charging it separately against the gross profit). However it wouldn’t really be called an impairment loss.
This is a question from ACCA Purchased Mock (Set of 3) Sep 23- Aug24
(Qn No 5 from 3rd Purchased Mock).
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