MGT101 - Financial Accounting 2nd GDB Solution 27 jan 2014

[Vuhelper]

MGT101 - Financial Accounting 2nd GDB Solution

Question/Description

Topic to be tested:

· Stock/Inventory Valuation



Learning Objectives:

· To develop an understanding about true and fair reporting of stock based on available and recommended methods of valuation and their impact on financial statements.



CASE:

Mr. A was a junior accountant of Fine Company Limited (FCL) which is involved in the manufacturing and marketing of homogeneous products with the brand name of Dry Milk while facing the period of inflation. He had left his job due to his domestic issues and Mr. B has been hired as his replacement. While reviewing the company’s accounting records, Mr. B has come to know that there has been no consistent stock valuation policy in the past for valuing the company’s stocks. This had lead towards an inappropriate impact on the financial reporting in terms of inconsistent profitability and financial position.



He has discussed the matter with the chief accountant – Mr. C who told him that the company is in the process of implementation program of related IASs on various accounting issues. As there has been no application of IAS’s in the company, therefore, the inventory has been treated on many valuation techniques including LIFO, FIFO, weighted average, and some others keeping in view the convenience to the accountant.



Mr. B suggested applying an appropriate valuation policy so as to produce consistency in the financial reporting. He emphasized that it will let the company to present fair reporting of the company’s operation and performance in the coming financial statements. He argued that this will also match the inventory costs as per the current market prices, and the inventory will reflect fairly current market prices in the company’s balance sheet. After going through this meeting, Mr. B has been asked to prepare a preliminary report on the inventory valuation of the present stock held with the company while using the appropriate stock valuation method.



Discussion Questions:

1. What was the stock valuation method used by Mr. A in past that cased a lower profitability and huge difference of market price of stock with its reported cost in balance sheet? (Just write the name of asked method)

2. Recommend Mr. B the most appropriate stock valuation method to use in his preliminary report for inventory valuation? (Just write the name of recommended method)

3. Upon what grounds did you recommend the method in question 2 above?



(Note: To avoid negative marking complete your comment within 100 words.)

[Vuhelper]

STOCK:

The goods or merchandise kept on the premises of a business or warehouse and available for sale or distribution to customers is called Stock.

Inventory Valuation Methods:

FIFO (First in First Out)
LIFO (Last in First Out)
Average Cost (Weighted or Moving Average Cost)

FIFO (First in First Out):

This method assumes that the first goods acquired are the first goods sold. This results in cost of goods sold being charged with the earliest cost and ending inventory stated in terms of the most recent cost.

LIFO (Last in First Out)

This method assumes that the last goods purchased are the first sold. This approach charges cost of goods sold with the latest acquisition costs and ending inventory is valued at the cost of the first goods purchased. LIFO produces a better measure of net income than FIFO because the most recent (and accurate) inventory prices are charged against current revenues in cost of goods sold.

Average Cost:

These methods assume that inventory valuation should be based on the average cost of all inventories available for sale during the period. A weighted average is used with periodic inventory systems and a moving average is used with perpetual systems.

[Vuhelper]

Mr. A used FIFO method

Mr. B Used Average method

Q.3

Mr. A aik complete policy se working nai kar rahey they. Wo kabi karty they or kabi nai or is liye wo FIFO method used kar rahey they. Or Mr.B ne jab a kar revalueation ki to in ko pata laga k ye to profitability both low hai to Mr.B ne piher is ko Mr.C se discuss kiya is tarah piher Mr.C ne suggestioin ki Mr.B ko k ab se ow aik Poperly method se kam kary to ab Mr.B ko pehly waley stock or current stock ko la kar chalna tha to is liye mr.B ne average method ka used kiya

[Vuhelper]

there is written in 3rd Line of Scenario """" while facing the period of inflation. He had left his job due to his domestic issues and """"

Matlab Inflation Chal Raha tha, to Obviously Puranay Stock ki value Kam hogi aur nayee waalay stock ki zyaada.

Ab aagay Chaltay hein there written in 3rd paragraph of scenario in 4th, 5th and 6th Line """ He argued that this will also match the inventory costs as per the current market prices, and the inventory will reflect fairly current market prices in the company’s balance sheet. """

Matlab Mr. B nay jo Valuation method suggest kya us per amal kernay say Inventory ki Value Current Market Price Wali hogi.

Ab Aatay hein Questions Per ?



Q. No 1. Wo kaon sa method tha Jo Mr. A use ker raha tha aur Inflation waali stuation mein us ki Profitability kam ho rahi thi. Ye method LIFO hi ho sakta hey jab ap latest purchase ki gayi mehngi waali chezun ko pehlay issue ker k un ko cost ka part bana doo aur is tarah Cost Zyada ho aur Profit Kam.


Q. No 2. Mr B nay kaon sa method suggest kia ... k jis ki waja say stock ki valuation Current Market Price waali hogi... To ye Method Hota Hey FIFO jis mein jo chez pehlay aati hey wo pehlay issue ho jaati hey aur Aakhir mein stocjk mein wohi chez hi bach jaati hey jo akhir mein kharidi gayi hey, to is tarah stock ki valuation almost current market price waali hi hoti hey.


Q. No 3. Is lye k ye first of all LIFO to Inernational Financial Reporting Standards nay mana ker dia hey use kernay say, aur Limited Companies mein Inernational Financial Reporting Standards k mutabik accounting hoti hey. No 2 ye hey k ye inflation waala period hey, is lye ager ham FIFO method use nhn krin gay to hamari profitability kam zahir hogi

[Vuhelper]

1. LIFO method loses is effectiveness during times of inflation
2. LIFO method lowers profitability and shows current stock valued at the oldest price as the item purchased last at the higher price have been sold first and stock is left with older items purchased at lower prices than the currently high prices influenced by inflation.
3. In the FIFO method, oldest available purchase costs are transferred to cost of goods sold. That means the cost of goods sold has a lower value and the profitability of the organization becomes higher.
4. As the current stock is valued at recent most prices, the current assets of the company have the latest assessed values.

[Vuhelper]

Q#1
ans: FIFO method
Q#2
Ans: Weighted average method
Q#3

Ans:
I shall be recommend that weighted average method to produce consistency in the financial reporting.

We know that, LIFO method has been banned in limited companies by international financial reporting standard. We know that, this is an inflation period. And FIFO method is not suitable for this situation. In FIFO method higher value of inventory and lower cost of goods sold. And we want that, the inventory can reflect fairly current market price in the company Balance sheet. And inventory cost can reflect as per current market price. So, the weighted average method is suitable.