The directors of Burwood Ltd are disappointed by the draft profit for the year ended 30 June 2020, though it is not yet finalized. Brad Pitt, the company’s assistant accountant, has made the following suggestion as he believes the reported profit may be improved. The value of Burwood’s inventory at 30 June 2020 on the first-in, first-out (FIFO) basis is $80,000,000, however on the average cost basis (AVCO) it would be valued at $72,000,000. By adopting AVCO, Brad Pitt says the company would improve its profit for the year ended 30 June 2020 by $8,000,000. Burwood Ltd’s inventory at 30 June 2019 was reported as $60,000,000 on the FIFO basis, however on the AVCO basis it would have been reported as $53,600,000. Required: Explain how the company should treat the type of accounting change described above in preparing financial statements and how the accounting change affects the profits in 2020 in accordance with AASB 108 “Accounting Policies, Changes in Accounting Estimates and Errors”
The directors of Burwood Ltd are disappointed by the draft profit for the year ended 30 June 2020, though it is not yet finalized. Brad Pitt, the company’s assistant accountant, has made the following suggestion as he believes the reported profit may be improved.
The value of Burwood’s inventory at 30 June 2020 on the first-in, first-out (FIFO) basis is $80,000,000, however on the average cost basis (AVCO) it would be valued at $72,000,000. By adopting AVCO, Brad Pitt says the company would improve its profit for the year ended 30 June 2020 by $8,000,000. Burwood Ltd’s inventory at 30 June 2019 was reported as $60,000,000 on the FIFO basis, however on the AVCO basis it would have been reported as $53,600,000.
Required:
Explain how the company should treat the type of accounting change described above in preparing financial statements and how the accounting change affects the profits in 2020 in accordance with AASB 108 “Accounting Policies, Changes in Accounting
Estimates and Errors”
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