MGT101 - Financial Accounting 2nd GDB Solution 27 jan 2014

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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?



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