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FA Chapter 9 Questions – Inventory and IAS 2

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  3. Hi totur

    Question 2 of chapter 9 practice questions the correct answer is 1 and 3

    (Correct Answer which is 3) is ‘depraciation of factory plant’ but the whole question is about an inventory and we known that the inventory is current asset and has no depreciation expences what brought Factory plant here please

    Thank you

    • 1 and 3 is the correct answer.

      As explained in the free lectures, the inventory of a manufacturing company should be valued at the full manufacturing cost (both direct and indirect costs). Depreciation of the plant used to manufacture the goods is a manufacturing cost and is therefore included in calculating the value of the inventory.

    • Yes you are. As the document states, that relates to the tax treatment in the UK. The tax authorities adjust the financial accounting profit when calculating the tax (as you will discover in Paper TX). They do not (and cannot) dictate how a business prepares it’s accounts. (And tax rules (apart from the accounting treatment of sales tax) are not examinable in Paper FA). The same applies for the charging of depreciation (as I explain the lectures on depreciation) – in the financial accounts the business does what they think best, but when the tax is calculated the authorities change the depreciation to their own rules for calculating the profit on which the tax is calculated, but it does not affect the financial accounts.

      • Thanks. This is very tricky to me. If this is not allowed in tax, why not just treat it directly as tax regulations require.
        This is different from depreciation which is generally accepted globally.

      • Our FA lectures teach the ‘rules’ applicable to Paper FA exam questions and tax computations are not relevant until Paper TX.

        Also appreciate that the case you quote may well be relevant for Paper TX, but concerned horses, and as the document states, inspectors take a reasonably broad view.

        As you will find in Paper TX there are many things that are not allowable for UK tax purposes (for example, gifts to employees over a certain limit and provisions for irrecoverable debts) but that does not affect at all how businesses choose to deal with them in their financial accounts (or in many cases are required to deal with them per accounting standards).

  6. dear john sir i would like to point out that the ans for the question no 3 which has answer 188,500. there is little mistake instead of (,) you have put(.) by mistake at first it got me confused. otherwise all correct. you are really good teacher i would like to meet you in person some day

    • Thanks for the comment.
      The tests are only meant to be quick checks after each chapter. We state throughout the website that is is vital to buy a Revision Kit from one of the ACCA approved publishers, because they are full of exam standard questions for practice.

  9. Hi, with regards to question 3 my answer is 188500 and I chose 188.500. I know that a . And a , brings different amount. However the answer is the same as my answer. Could it be spelling mistake please?

  10. Hi,

    Was wondering, if sales tax is included into the cost of goods (valuation).

    1) If sales tax is recoverable, do not include it into inventory.
    2) If sales tax is irrecoverable, include it into inventory.

    Is my above illustrations correct?

    Another question: What is the difference between registered and non registered sales companies?

    1) Registered: Collect taxes on behalf of government and can claim on input taxes. [Illustration]
    2) Non registered: No claims can be made on taxes, paid taxes either capital or revenue expenditure [Illustration]
    3) Does non registered company charge/collect taxes on it product or services? [Question]

    Please do correct my above illustration and question if wrong.

    Thanks in advance for your greatly appreciated help, your site is a great aid to my F3 studies.

    • Add on:

      Cost should include all: [IAS 2.10]

      costs of purchase (including taxes, transport, and handling) net of trade discounts received

      Question: Given that only trade discount is mentioned, do i have to exclude purchase discount and purchase allowance as well?
      For example, purchase of 5000, purchase discount 50, thus inventory valuation is 4950 or in short net purchases. However given that only trade discount was mentioned my bet would be on 5000.

      Thks in advance for the help.

  11. Hi,

    For question 1 in this chapter, the underlying method is periodic period, am i right.

    Assume if the underlying method is perpetual (aka continuous), answer should be Debit Drawing and Credit Inventory, am i right?

    Thanks in advance for the help.

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