Question

The directors of KMSD, a limited liability company, are reviewing the company’s draft financial statements for the year ended 30 June 2015. The following material matters are under discussion: a. After the balance sheet date one of the company’s factories was seriously damaged by fire. Insurance will only cover part of the loss suffered. The company’s going concern status is not affected. b. One of the company’s buildings was revalued during the year. The directors are uncertain as to how the revaluation surplus should be included in the financial statements. The surplus has been separately disclosed as an item in the draft income statement. c. The draft financial statements for the entity for the year ended 30 June 2015 have been prepared. A final review of the draft reveals an overvaluation of the closing inventory of GHS 200,000 at 30 June 2014. Further investigation shows that there was an overvaluation at 30 June 2013 of GHS 120,000 Explain how each of these matters should be dealt with in the financial statements for the year ended 30 June 2015, stating in each case the relevant accounting standard.

Answer 1

a. After the balance sheet date one of the company’s factories was seriously damaged by fire. Insurance will only cover part of the loss suffered. The company’s going concern status is not affected.

Answer -

Event ocurring After Balance sheet date -

Event which takes place after closure of financial year but before approval of financial statements are the events which needs to be disclosed in the financial statement as per the materiality of the effect on the financial statements / or by way of notes regarding the going concern of the company if the damaged is not severe.

In the given case the company’s factories was seriously damaged by fire and hence such event needs to be disclosed in the financial satement. The effect of such damaged on the assets and liabilities should be disclosed. The fact that Insurance will only cover part of the loss suffered shall also be accounted for.

In the notes explaining such damage need also to disclose the company’s going concern status is not affected.

b. One of the company’s buildings was revalued during the year. The directors are uncertain as to how the revaluation surplus should be included in the financial statements. The surplus has been separately disclosed as an item in the draft income statement.

Answer -

Revaluation of Assets -

Revaluation is the increase in the value of assets if as on the balance sheet date the value booked by the company is different in the books and as per fair value. Fair value as per market is the value of that particular asset in the market that needs to be upward as per the changes in the fair value.

Company needs to revalue that particular assets by increasing the book value and crediting into Revaluation Reserve Account.

Surplus is not profit of the company hence it will not be disclosed in the income statement.

c. The draft financial statements for the entity for the year ended 30 June 2015 have been prepared. A final review of the draft reveals an overvaluation of the closing inventory of GHS 200,000 at 30 June 2014. Further investigation shows that there was an overvaluation at 30 June 2013 of GHS 120,000

Answer -

Closing Inventory overstated -

If the inventory overstated in the financial it affects the gross profit for the period because you income gets increase when you increase the value of closing inventories. Cost of goods sold also gets affected and Assets also gets affected due to wrong value of closing stock

If the effect of overstatement is big then company have to restate their accounts and make the changes in the perior periods. Or else company can make the changes accumulated in the current period in the stock as per the prior adjustments and reduce the profit of the current period.