Graded Discussion Board: 02 (Fall2013)
MGT 401
“Measurement of Inventories IAS-2”
SWAN
Shoes Ltd. was established in 1980. Initially, company was engaged in
leather processing, manufacturing of shoes and its trade in local
market. In 1998, it expanded its business internationally & started
exporting shoes. Main target of the company were European countries. In
today’s competitive environment, companies across industries are
emphasizing on inventory valuation. Management of the company is
interested in changing its inventory valuation technique from FIFO to
weighted average. Prices of leather are increasing day by day. Selection
of method used for inventory valuation does not change the reality of
economic transactions, that have occurred but it is taken into
consideration for financial reporting propose.Accountant of SWAN Shoes Ltd. reported following differences if company switches to weighted average method from First-In-First-Out method.
Year
|
Inventory
|
First-In-First-Out (Rs.)
|
Weighted Average Method
(Rs.)
|
2002
|
Opening
|
34,000
|
30,000
|
2002
|
Closing
|
45,000
|
51,000
|
2003
|
Closing
|
65,000
|
60,000
|
2004
|
Closing
|
60,000
|
66,000
|
Q1. What will be the effects of above figures on the profits of the respective years due to change in the basis of valuation? Give arguments to justify your answer. (Marks 4)
Q2. In the year 2004, 1/3rd of the inventory was damaged. It has been estimated that it will now be sold at 10% less than the normal selling price which is 25% above the weighted average cost. To fetch this sale, the company has to incur Rs. 1,500 on rework of the inventory. Determine the value of the damaged inventory to be presented in the balance sheet.(Mark 1)
Idea Solution :
In
the first question I think we are only suppose to discuss and give
relevant reasons that company k profits pr year 2002, 2003 aur 2004 pr
ky effect hoga as it has changed the valuation method from fifo to
wam...Theoretically speaking, men ny hr saal k liay values ko
consideration men rkhty huay likha hy k fifo men profits zyada hoty hen
aur wam men average values use ki jati hen...prices of leather increase
hony ki whja sy cost of goods sold brhy gi, lekin fifo men profits zyada
aur wam men kam hongy.....
Am I right?????
Aur second kuch is tarah samajh aya hy....
s.p:
= 0.25*60,000= Rs.15,000 (60,000 is the opening inventory of 2004 for wam)
=75,000(60,000+15,000)
costs on rework= Rs.1500
value of damaged inventory is 1/3 * 60,000= Rs. 20,000
the value of damaged inventory to be reported in balance sheet would be:
75,000-20,000-1500= Rs.53,500
Am I right?????
Aur second kuch is tarah samajh aya hy....
s.p:
= 0.25*60,000= Rs.15,000 (60,000 is the opening inventory of 2004 for wam)
=75,000(60,000+15,000)
costs on rework= Rs.1500
value of damaged inventory is 1/3 * 60,000= Rs. 20,000
the value of damaged inventory to be reported in balance sheet would be:
75,000-20,000-1500= Rs.53,500
