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Question part of cash flow:
Goods were purchased for Dinar 80 million cash when the exchange rate was $1:Dinar 5. Moyes had not managed to sell the goods at 30 September 20X8 and the net realisable value was estimated to be Dinar 60 million at 30 September 20X8. The exchange rate at this date was $1:Dinar 6. The inventory has been correctly valued at 30 September 20X8 with any expense correctly included within cost of sales.
Answer in Kaplan Kit as below:
Inventory is measured at the lower of cost and net realisable value. The inventory has suffered an overall loss of $6 million (Dinar 80 million/5 – Dinar 60 million/6). This is not a cash flow and would be added back to profits in the reconciliation. However, the loss of $6 million should also be adjusted in the year-on-year inventory movements. The net effect of this on the statement of cash flows will be nil.
Reduction in inv($126m – $165m + $6m) 33 Loss on inventory 6
My question is as below:
When we are already adjusting for the loss in the inventory why do we need to add it back to profit before tax again? I thought we would only take 33 ($126m – $165m + $6m) to profit before tax as reduction in inventory which already adjusts the forex exchange loss.Why do we add back 6 again after adjusting in the inventory working????.I haven’t come across any other question where we add/deduct forex gain or losses seperately after adjusting in the resepective workings for assets/liability eg PPE,inventory,receivables etc.
I think the printed answer is excessively complicated.
Inventory has changed by 39. I was just show a reduction of 39 as a single number in the cash flow. If you don’t adjust £39 then it will not balance. Technically 33 is a reduction in physical stock and six is a revaluation downwards of stock which would have been charged to profit and loss. But you will not have time to sort that out in the exam.
I have seen the adjustment in earlier questions but not for some years
So does that mean the $ 6 has nothing to do with forex loss? Does this only apply to inventories or other assets as well?
Really confusing as to why $ 6 is again added back when already adjusted in inventory!
The six is the forex loss but as I said before you would not have time to separate this out. Everyone would have just looked at the movement on inventory of 39 and put that in the cash flow.
Please remember that in calculation questions the marks are given for approach so I would be surprised if candidates lost any credit for not separating out the six.What really matters is that your explanations are clear and simple.
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