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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If the ending inventory is overstated in the current year: Net income will be understated in the current year. Next year's beginning inventory will also be overstated. Next year's net income will be overstated. Next year's beginning inventory will be understated.
Adjusting Balance Sheet and Income Statement for LIFO to FIFO In its December 2019 10-K, Phillips 66 reported the following information ($ millions). 2019 Assets 2019 Inventories 2019 LIFO Reserve 2018 LIFO Reserve Tax Rate $52,848 $3,398 $3,870 $2,610 22% a. Determine the necessary adjustments to the following balance sheet line items for 2019. Note: Round your answers to the nearest whole dollar. Adjustment (S in millions) Inventories $4 6,008 x Total assets %24 Deferred tax liabilkies $ 54,108 x 277 x Equity 0 x b. Determine the necessary adjustments to the following income statement line items for 2019. Note: Round your answers to the nearest whole dollar. Adjustment ($ in millions) Cost of goods sold %24 0 x Pretax income %24 0 x Income tax expense $ 0 x Net income %24
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Halicon Ltd. applies the lower of cost or NRV valuation to inventory. The company's inventory at the end of the year is as follows Required: Determine the amount of any adjustment that is required to inventory under each of the following valuation methods: (Enter all amounts as positive values.) By individual type of item. By class of inventory.
1. If ending inventory on December 31, 2019, is overstated, then, a) cost of goods sold for the year ended December 31, 2020, will be understated. b) gross profit for the year ended December 31, 2019, will be understated. c) gross profit for the year ended December 31, 2020, will be understated. d) cost of goods sold for the year ended December 31, 2019, will be overstated.
Identify which of the following statement is correct for perpetual inventory system? When valuing ending inventory under a perpetual inventory system, weighted average cost method requires that a new weighted average unit cost be calculated after every sale. When valuing ending inventory under a perpetual inventory system, valuation using weighted average is the same as the valuation using weighted average under the periodic inventory system. When valuing ending inventory under a perpetual inventory system, oldest units purchased during the period using FIFO are allocated to the cost of goods sold when units are sold. 5 Under the perpetual inventory system, on the purchase of inventory purchase account is debited. 7
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For each change or error below, indicate how it would be accounted for. 1. Change due to understatement of inventory. options: A.) accounted for prospectively b.) prior period adjustment 2. change from direct write-off to allowance method of accounting for bad debts. Options: a.) accounted for retrospectively b.) prior period adjustment
Question: Which of the following inventory valuation methods typically results in higher ending inventory value during periods of rising prices? A) FIFO (First-In-First-Out) method B) LIFO (Last-In-First-Out) method C) Weighted Average method D) Specific Identification method
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