Question

1. If a company were to choose one inventory valuation method in the current year, and then decide in the following year to change inventory valuation methods to a method that better approximates the company’s actual costs:
2. 1. Would this be accounted for as a change in accounting estimate or a change in accounting principle?   (Provide the Codification reference for your answer)
3. 2. Where is the Example provided in the Codification that illustrates the guidance for the retrospective application of a change from LIFO to FIFO (assuming it is practicable to determine the cumulative effect of the change for all prior years)?   (Provide the Codification reference for your answer)

2. ABC Company is a manufacturing company. Based on the criteria in the Codification, explain why each of the following items would or would not be included in Inventory Cost for ABC.   (Provide the Codification reference for your answer)
3. 1. Expenses incurred for marketing to sell ABC’s inventory
4. 2. General & administrative expenses incurred by ABC that are not clearly related to production
5. 3. Normal freight charges paid by ABC to its suppliers for inventory items purchased
6. 4. Abnormally high freight charges paid by ABC to its suppliers for inventory items purchased

Answer 1

1a) Yes, It is accounted as change in accounting policy because change in valuation method reflects the actual flow of inventories and hence, provides reliable and more relevant information to the users of financial statement .

a) An entity which is trading in goods (not a manufacturer )and is a regular user of IFRS from that year . It has been using LIFO cost formula for determining inventories . Now it decides to change the above accounting policy . It wants to use FIFO Cost formula . The change in policy is justified because change in valuation method reflects the actual flow of inventories and hence, provides reliable and more relevant information to the users of financial statement .The entity presents one year comparative period in its financial statements .

In the above stituation, the entity should apply the change in accounting policy retrospectively. For this purpose the entity should recalculate inventory value at the lower of cost determined on FIFO bases and NRV . The difference between the previously presented opening inventory value and the recalculated value as on that date as above is the cumulative effect of change in accounting policy on the opening balance sheet for the comparative year .

The difference between the previously presented closing inventory value and recalculated value as on that date above is the cumulative effect of change in accounting policy on the closing balance sheet for the comparative year

Q) ABC Company is a manufacturing company. Based on the criteria in the Codification, explain why each of the following items would or would not be included in Inventory Cost for ABC.

Cost of inventories comprises of all costs of purchase , Cost of conversion and other costs incurred in bringing the inventories to their present location and condition .this includes purchase price , import duties other than recoverable , transport handling and freight etc .

But doesnt include

• abnormal amounts of wasted materials , labour or other production costs
• storage costs, unless those costs are necessary in the production process before a further production stage
• administrative overheads that do not contribute to bringing inventories to their present loaction and condition
• selling costs

Based on the above definition

a) Expenses incurred for marketing to sell ABC’s inventory - would not include

b) General & administrative expenses incurred by ABC that are not clearly related to production - would not include

c) Normal freight charges paid by ABC to its suppliers for inventory items purchased - Would include

d) Abnormally high freight charges paid by ABC to its suppliers for inventory items purchased - Would not include