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Kiera’s interior design business received a delivery of fabric on 29 June 20X6 and was included
in the inventory valuation at 30 June 20X6. As at 30 June 20X6, the invoice for the fabric had
not been accounted for.
Based upon the available information, what effect(s) will this have on Kiera’s profit for the
year ended 30 June 20X6 and the inventory valuation at that date?
(1) Profit for the year ended 30 June 20X6 will be overstated.
(2) Inventory at 30 June 20X6 will be understated.
(3) Profit for the year ended 30 June 20X7 will be overstated.
(4) Inventory at 30 June 20X6 will be overstated.According to my understanding of the topic. As the inventory(29june) was counted in closing inventory but its invoice was yet not entered in the accounts, so inventory was understated than its total value, assuming there was inventory in the warehouse before (29june). In this effect Opening inventory for the next year 20X7 must be understated, making the profit overstated for 20X7. MY ANSWER 2,3
WHILE IN THE KIT ANSWER IS 1 only. didn’t get how?As I explain in my free lectures on inventories, the inventory is entered at the and of the period and is separate from the entry for the invoice.
The inventory is counted and the question says that it fabric has been included in the inventory valuation, and that is correct.
The only missing entry is the entry for the invoice. Because it has not been entered the figure for purchases will be too low and therefore the profit will be overstated.
I do suggest that you watch my free lectures on inventory. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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