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Sir i dont understand the cacluation bit regarding prior year adjustment in part ii
When we change an accounting policy, we have to apply it retrospectively, as though the new policy had been the policy always previously applied.
If we change the policy and that change has the effect of reducing closing inventory values, that in turn will increase cost of sales and thus reduce profits.
Applying this new policy to the previous year, the previous year’s profits will be reduced by the amount of reduction caused by the change and that will affect the opening inventory used in the calculation of this year’s cost of sales (it will reduce this year’s cost of sales)
But then we apply the new policy to this year’s closing inventory and again that has an effect on this year’s cost of sales by increasing cos by the 2m
So, if we reduce cos by last year’s 1.6m and increase it by 2m, that gives a net increase of .4m and a corresponding fall in profits
Better?
Its so awesome everytime when I can’t understand answer for exercise in revision kit I can find solution on OT because someone already asked about it. Thank you Mike!
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