Page 58 - Accountancy_F5

Required:
(a) Record the inventory, purchases, and cost of sales on a inventory valuation
sheet using the FIFO, WAM and LIFO methods.
(b) Determine the profit to be reported using the FIFO, WAM and LIFO methods.
Provide comments on the results obtained, focusing on explaining the reasons
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behind the observed differences.

Inventory measurement and financial impact
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After determining the value of inventory, it is essential to decide how to report it in
the financial statements. Inventory can lose value due to factors like wear and tear,
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obsolescence, or physical deterioration. This means that its actual worth at the end of a
reporting period might be lower than what the business initially paid for it. In such cases,
it is crucial to ensure that the inventory’s value in the financial statements accurately
reflects its true value and follows the principle of prudence. The prudence concept involves
being cautious and estimating potential losses from transactions. Therefore, according
to the principle, the closing inventory should be reported in the financial statements at
the lower of its cost or its net realisable value (NRV).

According to the International Accounting Standards (IAS) 2, the cost of inventory
includes not just the actual purchase costs, but also taxes, expenses related to converting
materials into finished goods, and the costs of transporting the inventory to its current
location and condition. Net realisable value, as defined by the standard, is the selling
price of the inventory minus the costs associated with making that sale.

Example 2.4
Ladies’ shoes were purchased at TZS 18,000 per pair and were subsequently sold for
TZS 20,000 per pair in the ordinary course of business. During the year-end inventory
count, 10 pairs of shoes were found to be damaged. These shoes require repairs costing
TZS 1,000 per pair before they can be sold at a discounted price of TZS 17,500 each.
Required:
(a) Calculate the cost of the damaged shoes.
(b) Determine the net realisable value of the damaged shoes.
(c) Ascertain the value at which the shoes should be reported in the financial
statements.
(d) Assuming the repaired shoes could be sold for TZS 19,500 each, what value
should be assigned to the shoes in the financial statements?

Student’s Book Form Five
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