Question

You are a junior accountant, recently employed by RM Resources Ltd., a public company traded on the Toronto Stock Exchange. The company is based in Alberta and it operates two divisions: an oil and gas exploration division, and a heavy equipment manufacturing division. The company is aggressively pursuing overseas partners who could provide further financing to expand operations into Asia.

You arrive at work on a Monday morning in early January, 2019 and receive the following email:

To: Junior Accountant

From: Controller

Re: Preparation for annual audit

I am preparing the working papers for the December 31, 2018 year-end audit to present to the company’s auditors when they arrive late next week. In reviewing the draft financial statements and other information, I have identified a number of issues that need to be addressed:

1. Inventory Errors: in reviewing the documentation obtained during the December 31, 2018 inventory count for the heavy equipment division, I discovered a number of errors. The details are provided below.

1. We received an invoice from a supplier on January 3, 2019 for goods purchased with a cost of $61,000. This invoice was entered into our accounts payable system on that date. The goods were shipped by the supplier on December 26, 2018 and were received by us on January 3, 2019. The invoice terms were 2/10, n30, FOB shipping. These goods were a special order for one of our customers, and we sold the goods to the customer on January 7, 2019 for $93,000. These goods were not included in the December 31 inventory count. What are the key financial reporting issues? Where possible. What is the potential impact of the issue on the balance sheet and income statement, and explain why an adjustment is required? If there are areas where judgment is involved, or the accounting treatment is not clear. What are the alternatives that are available and factors that need to be considered in choosing an alternative?

Answer 1

Invoice Received from Purchaser	03-Jan-19
Goods worth Rs.			61000$
Goods Shipped on 26 December 2018	FOB Shipping
Goods sold on 07 th January 2019	93000$
Issues to be addressed
1	Goods Invoiced are not included in the inventory count for the FY 31 December 2018
2	Key Reporting Issues
3	Potential Impact on the Fiancial Stament ( b/s and Incoem Statement)
4	Adjustment required why
5	If the treatment is not clear what alternative is available for the presentation

Accordingly:

1. They Need to be included in the Inventory count of the Buyer (RM Resources Limited) as the transactions terms are based on FOB Shipping, which means once the goods leave the warehouse of the Seller at the sam etime deemed as risk and title both are transfered in the hands of the RM resource limited irrespective of the fact of the actual delivery of the goods, becasue risk and title is transfered on 26 december 2018 itself. hence they need to be included in the inventory count of the RM Resources limited.

2. key reporting issue is AS per the IAS 2, the comapny need to mention the inventory count and valuation as on balance date with cost or NRV which ever is less, if the inventory itself is wrong the valuation is not appropriately recorded in the books.

3.Non reporting of the same will undervalue the inventory count only. It will not have any impact in the revenue becaue sam ecost will be added in purchases as well as same will be fall in the closing inventory also. hence Revenue will not be impacted but inventory count will be understated.   Balance sheet show the undervaluation of inventory, and Incoem statment is not impacted. ( 61000$ payable will increase and on asset side 61000$ Inventory will increase)

4. Adjustment entry becasue same is required to be shown in the books of accounts for true and fair view of the finacial statements of the organsiation.

5. No Alternative is available because, it is clearly evident that inventory belongs to the RM resources limited and non recording will undervaluate the valuation of the inventories. Otherwise marked as goods in transit even though they same need to mark purchases, book payable and include in its inventory under the head goods in transit.

As per the real fact no other alternatve is available apart from booking the inventory as inventory or eithwe as Goods in transit. simple.

RM resources limited has nothing to deal with the sale portion becasue, they are the transaction deals in the next finacial year.