Question

QUESTION FOUR - assignment two

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains guidance on the use of accounting policies and accounting estimates. Chipata Supermarkets Limited owns a chain of retail shops. Most of Chipata Supermarkets Limited’s competitors value their inventory using the average cost (AVCO) basis, whereas Chipata Supermarkets Limited uses the first in first out (FIFO) basis. The value of Chipata Supermarkets Limited’s inventory at 31 December 2019 (on the FIFO basis) is K20 million. However, on the AVCO basis it, would be valued at K18 million. By adopting the same method (AVCO) as its competitors, the financial accountant says the company would improve its profit for the year ended 31 December 2019 by K2 million. Chipata Supermarkets Limited’s inventory at 31 December 2018 was reported as K15 million, however on the AVCO basis it would have been reported as K13.4 million.
Required:
(a) Explain the basis on which the management of an entity must select its accounting policies and distinguish, with an example, between changes in accounting policies and changes in accounting estimates. [5 Marks]
(b) Comment on the acceptability of the financial accountant’s suggestions and quantify how they would affect the financial statements if they were implemented in accordance with IFRS requirements. Ignore taxation. [10 Marks]
[TOTAL: 15 Marks]

Answer 1

Answer to a:

The management of the company must select appropriate accounting polices which is best to the industry practice & which shows appropriate profit picture of the company.

For Inventory Valuation also, the management of Chipata Supermarkets Limited can use AVCO method for valuation of inventories which is followed in industry.

Changes in Accounting Polices	Changes in Accounting Estimates
The method of changing the valuation of Inventory or any other item of Profit & Loss account or Balance Sheet is Change in Accounting Policy.	The Method of Change of Estimates for Depreciation, Provisions, Doubtful Debts, etc is change in an Accounting Estimate.
Example: 1. Method of Inventory Valuation.	Example: 1. Creation of Provisions. 2. Change in Useful Life of Assets.

Answer to b:

The Suggestions of Financial Accountant is not valid as profit is decreasing not improving So the management of Chipata Supermarkets Limited should revised the figures below.

Increase in Profit by Reducing Opening Inventory                   1.6K Million

Decrease in Profit by Decreasing Closing Inventory                 2.00K Million

Net Decrease in Profit                                                                     0.40K Million