PART 2The Covid-19 pandemic that started in early 2020 has taken a toll on BB businesstremendously. By November 2020, its sales had declined by more than 50 percent, comparedto the same period for 2019. The management of BB were worried that BB would not be ableto reach its forecasted sales and profits for 2020. This was the main concern of the BB'smanagement as their compensations are tied with the company’s profitability.Since early November 2020, BB had been doubling its efforts to increase its sales. After takingthe necessary measures to increase its sales, BB, on 15 December 2020, managed to secure a large order from a customer in Jakarta, Indonesia. The customer had specifically informed BBthat it would take delivery of the products in early January 2021. This large order was a hugerelief to the management of BB. Instruction was made to the account manager to record theorder amounting RM350,000 as sale revenue for year 2020. Furthermore, instruction was madeto record the products ordered by the customer as inventory for 2020 as shipment would onlybe made in January 2021. Cost of the products was RM60,000. However, the account managerhad unintentionally made an error in recording the inventory, which had resulted the endinginventory overstated by RM60,000. BB’s financial year ends on 31 December.During 2020, the inflation had increased due to the Covid-19 pandemic. The increasing priceshad affected BB's cost of production. The management of BB were concerned about inventoryvaluation method during the inflationary period. Since its inception, BB has been using theaverage-cost method to account for its inventories. The management of BB considered tochange to the FIFO method for financial year 2020 as the method is believed could improveBB's profitability during the inflationary period. The accountant, Mrs. Tara had been asked tolook into this matter. Following is BB's statement of profit or loss.Bio Beauty BhdStatement of Profit or LossFor the year ended 31 December 2020RM(*000)2,000RevenuesCost of goods sold:Beginning inventoryPurchases250450700Goods available for saleLess: Ending inventoryCost of goods soldGross profitAdministrative and selling expenses2005001,500400Net income1,100You are required to:(a) Discuss how BB’s profitability in 2020 and 2021 would be affected as it recorded theorder as sales revenue for 2020 and overstated ending inventory for 2020.(b) Prepare the corrected statement of profit or loss for the year ended 31 December 2020.(c) Compare the average-cost method and the FIFO method and discuss which methodwould provide higher profit during the inflationary period.(d) Discuss whether it is appropriate for BB to change the inventory valuation method inorder to improve its profitability.

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(a) Discuss how BB's profitability in 2020 and 2021 would be affected as it recorded the order as sales revenue for 2020 and overstated ending inventory for 2020. (b) Prepare the corrected statement of profit or loss for the year ended 31 December 2020. (c) Compare the average-cost method and the FIFO method and discuss which method would provide higher profit during the inflationary period. (d) Discuss whether it is appropriate for BB to change the inventory valuation method in order to improve its profitability.

(a) Discuss how BB's profitability in 2020 and 2021 would be affected as it recorded the order as sales revenue for 2020 and overstated ending inventory for 2020. (b) Prepare the corrected statement of profit or loss for the year ended 31 December 2020. (c) Compare the average-cost method and the FIFO method and discuss which method would provide higher profit during the inflationary period. (d) Discuss whether it is appropriate for BB to change the inventory valuation method in order to improve its profitability.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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