GRANDE FINALE PROBLEM-SOLVING SESSION

FINANCIAL REPORTING (B2)

FOR MAY 2023 EXAMS

&

SET 2
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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION ONE [ PROPERTY PLANT AND EQUIPMENT – IAS 16]

QUESTION TWO [IMPAIRMENT OF ASSET – IAS 36]

QUESTION THREE [IMPAIRMENT OF ASSET – IAS 36]

QUESTION FOUR [ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS]

QUESTION FIVE [ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS]

QUESTION SIX [ BORROWING COSTS – IAS 16]

QUESTION SEVEN [ BORROWING COSTS – IAS 16]

QUESTION EIGHT [INVENTORY – IAS 2]

QUESTION NINE [INVENTORY – IAS 2]

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION ONE

(a) In accordance with IAS 16 – Property, Plant & Equipment, describe the criteria for the
recognition of property, plant and equipment in the financial statements.
(b) Explain the accounting treatment allowed for the measurement of property, plant and
equipment:
(i) At recognition;
(ii) After recognition

(c) SHAMBANI Company Ltd had the following tangible non-current assets in its statement
of financial position as at 31st December 2014:

Cost Depreciation Carrying amount

TZS.‘000’ TZS.‘000’ TZS.‘000’
Land 1,000,000 - 1,000,000
Buildings 800,000 160,000 640,000
Plant and machinery 3,226,000 916,000 2,310,000
Fixture and fittings 780,000 280,000 500,000
Assets under construction 182,000 - 182,000
5,988,000 1,356,000 4,632,000
======= ======== =======
In the year ended 31 December 2015 the following transactions occurred.
st

(i) Further costs of TZS.106 million were incurred on building being constructed by the
company. A building costing TZS.200 million was completed during the year.
(ii) A deposit of TZS.40 million was paid for a new computer system which is undelivered at
the year end.
(iii) Additions to plant were TZS.308 million.
(iv) Additions to fixtures, excluding the deposit on the new computer system, were TZS.80
million.
(v) The following assets were sold:
Depreciation
Cost Brought forward Proceeds
TZS.‘000’ TZS.‘000’ TZS.‘000’
Land 554,000 390,000 172,000
Fixture and fittings 82,000 62,000 4,000
(vi) Land and buildings were revalued at 1st January 2015 to TZS.3 billion of which land is
worth TZS.1.8 billion. The revaluation was performed by Garson & Co, Property Valuers,
on the basis of existing use value on the open market.
(vii) The useful economic life of the buildings is unchanged. The buildings were purchased 10
years before the revaluation.
(viii) Depreciation is provided on all assets in use at the year end at the following rates:
Buildings 2% per year straight line
Plant 20% per year straight line
Fixtures 25% per year reducing balance.
REQUIRED:
By using the above information, show the disclosure under IAS 16 in relation to non-current
assets in the notes to the published accounts for the year ended 31st December 2015.

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

SOLN
a) The recognition of property, plant and equipment depends on two criteria:
• It is probable that future economic benefits associated with the asset will flow to the entity
• The cost of the asset to the entity can be measured reliably

b) i) Initial measurement
All items of property, plant and equipment are recognised at cost.

ii) Measurement subsequent to initial recognition

After recognition, property, plant and equipment can be recognised using either the cost model or the
revaluation model.

The Cost model is where PPE is carried at cost less accumulated depreciation and impairment losses.

The Revaluation model is where PPE is carried at revalued amount with the revalued amount equal to the fair value
at date of revaluation less subsequent accumulated depreciation and impairment losses.

c) Solution

IAS 16 requires the disclosures for each class of property, plant and equipment. Among others,
the standard requires the disclosure of:
(i) Measurement bases used for determining the gross carrying amount.
(ii) Depreciation methods used
(iii) Useful lives or the depreciation rates used
(iv) The gross carrying amount and the accumulated depreciation
(v) Reconciliation of the carrying amount at the beginning and the end of the period.
(vi) If items of property, plant and equipment are stated at revalued amounts, the following
shall be disclosed in addition to the disclosure required by IFRS 13:
(a) The effective date of the revaluation
(b) Whether an independent valuer was involved
(c) For each revalued class of property, plant and equipment, the carrying amount that
would have been recognise had the assets been carried under the cost model and
(d) The revaluation surplus, indicating the change for the period and any restriction on
the distribution on the balance to shareholder.
With reference to information provided for SHAMBANI Company Ltd, the following are the
disclosures as required by IAS 16:
I. Property, plant and equipments are stated by using cost model and revaluation model.
II. Depreciation is provided on all assets except for land. Depreciation is calculated by using,
straight line method for building & plant and diminishing/reducing method for fixtures.
III. Assets are depreciated at 2%, 20% and 25%, for buildings, plants and fixtures respectively.
IV. Land and buildings were revalued on 1st January 2015. The exercise was conducted by
Garson & Co. Property Valuers on the basis of existing value on the open market.

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION TWO
PART A
The main objectives of IAS 36 Impairment of Assets, is to prescribe the procedures that should ensure that
the entity’s assets are carried at no more than their recoverable amounts.
Required
a) Define carrying amount
b) Define asset's fair value less costs of disposal
c) Define value in use
d) Explain how the recoverable amount of an asset is determined.
e) Define the term “impairment loss”.
f) List the main indications which would suggest that an asset might be impaired
g) Identify the two types of asset which must always be tested for impairment, even if there is no
indication that that impairment has occurred.
h) Define a cash generating unit [CGU]
i) Explain the circumstances in which a CGU should be tested for impairment
j) Explain the order in which impairment loss should be allocated between the assets in cash
generating unit
SOLUTION
a) carrying amount
This is the amount at which an asset is recognized in the statement of financial position, after deducting any
accumulated depreciation and impairment loss.

b) An asset's fair value less costs of disposal

is the price that would be received to sell the asset in an orderly transaction between market participants at
the measurement date, less direct disposal costs, such as legal expenses.

c) value in use
Is the present value of future cash flows expected to arise from the asset over its remaining life and from its
disposal.

d) Explain how the recoverable amount of an asset is determined.

Recoverable amount is the higher of Net fair value and value in use
The asset's fair value less costs of disposal
Is the price that would be received to sell the asset in an orderly transaction between market participants at
the measurement date, less direct disposal costs, such as legal expenses.
Value in use-Is the present value of future cash flows expected to arise from the asset over its remaining life
and from its disposal.

e) Define the term “impairment loss”.

IAS 36 defines an impairment loss as “the amount by which the carrying amount of an asset or cash
generating unit exceeds its recoverable amount

f) List the main indications which would suggest that an asset might be impaired
i] Internal Indicators of impairment
• Significant change in the manner in which the asset is used
• obsolescence or physical damage
• plan to restructure or discontinue the operations for which an asset is used
• worse economic performance than expected. This may be indicated by low operating profit or operating
losses for a part of the business
• Projections demonstrating continuing losses associated with an asset
ii] External indicators of impairment
• Unexpected significant decline in the asset’s market value
• Changes in technology, markets, business climate, economy, or laws/legal factors in which an asset operates

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

• Increases in market interest rates. These will reduce the present value (VIU) of an asset’s future cash flows,
and may in turn reduce its recoverable amount.
• company stock price is below book value

g) Identify the two types of asset which must always be tested for impairment, even if there is no indication that
impairment has occurred.
• The two types of asset which must always be tested for impairment are intangible assets which have indefinite
useful life (or which are not yet available for use for impairment annually by comparing its carrying amount
with its recoverable amount.) and goodwill acquired in a business combination. This impairment test may be
performed at any time during an annual period, provided it is performed at the same time every year. However,
if such an intangible asset was initially recognized during the current annual period, that intangible asset shall
be tested for impairment before the end of the current annual period.
• For tangible assets and intangible assets with finite useful lives an entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such indication exists,
the entity shall estimate the recoverable amount of the asset.

h) Define a cash generating unit [CGU]

▪ A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of
cash inflows generated by other assets or group of assets
i) Explain the circumstances in which a CGU should be tested for impairment
A CGU should be tested for impairment if there are indications that an asset which belong to the CGU is impaired
or that the CGU as a whole is impaired. A CGU to which goodwill has been allocated should be tested for
impairment every year regardless of whether or not there are any indications of impairment.

j) Explain the order in which impairment loss should be allocated between the assets in cash generating unit
An impairment loss should be recognised for a cash - generating unit if (and only if) the recoverable
amount for the cash- generating unit is less than the carrying amount in the statement of financial
position for all the assets in the unit. When an impairment loss is recognised for a cash- generating unit,
the loss should be allocated between the assets in the unit in the following order.
(a) First, to any assets that are obviously damaged or destroyed
(b) Next, to the goodwill allocated to the cash generating unit
(c) Then to all other assets in the cash-generating unit, on a pro rata basis

PART B
An asset which cost TAS200,000 on 1 January 2008 is being depreciated on the straight line basis
over a five year period with an estimated residual value of TAS40,000. The company which owns
the asset has conducted an impairment review at 31st December 2009 and estimated that the asset
will generate the following cash flows over the remainder of its useful life:
Year Inflows Outflows
2010 45
TAS000 5
TAS000
2011 35 5
2012 60 5
The cash inflow for 2012 includes the estimated residual value of TAS40,000. The asset could be
sold on 31st December 2009 for TAS110,000, Disposal costs would be TAS6,000
Requirement
a) Determine the asset value in use, assuming that all cash flows occur at the end of the year
concerned and using a discount rate of 8%
b) Determine the asset‟s recoverable amount
c) Calculate the amount of the impairment loss that has occurred

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION THREE
Zaga plc has recently been acquired by a new owner who has installed a new management team.
there was an industrial accident (a gas explosion) that caused damage to some of Zaga’s plant. the
finance director has doubts about the value of some assets on the statement of financial position.
The company has two divisions which currently employ the following net assets:
The assets of Zaga immediately before the accident were
Mabati ushi
Division Division
TSHS000 TSHS000
Fixed assets
Factory Building 9,500 9,000
Plant 6,200 6,000
Intangible (patent) 400 -
Goodwill 100 620
Inventory 250 320
Debtors 200 300
Cash at bank 500 280
17,150 16,520
In addition the company has central building which has carrying amount of TSHS4,500,000.
These are estimated to be equally related to the two divisions. None of the assets have been
revalued in the past.
The explosion destroyed (to the point of no further use) an item of plant that had a carrying
amount ofTAS500,000.
The intangible asset of the Mabati division relates to the cost of a patent acquired from a
competitor several years ago. It is estimated that the patent has a net fair value of TSHS380,000.
Both divisions have suffered from under investment in recent years.
The net fair value of the Mabati division is estimated to be TSHS13,500,000 and TSHS12,000,000
for the Ushi division.
Budgeted pre-tax cash flows for the next 4 years are as follows:
Mabati Ushi
TSHS’000 TSHS’000
Year 1 3,800 4,700
Year 2 3,900 4,750
Year 3 5,500 5,300
Year 4 5,200 6,000
The required rate of return is 14% for both divisions. The significant increases in cash flow will
arise from the impact of the new management team. There will be no significant cash flows
from the assets employed in each division after year 4.
Required:
(i) Calculate the extent of any impairment in either division; and
(ii) Prepare a schedule of adjustments to the net assets of each division.
Discount factors at 14% are:
Year Factor
1 0.877
2 0.769
3 0.675
4 0.592

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION FOUR
The following information has been extracted from the recently published accounts of DG.
EXTRACTS FROM THE STATEMENTS OF COMPREHENSIVE INCOME TO 30 APRIL
2008 2009
$’000 $’000
Sales 9’750 11,200
Cost of sales 6,825 8,460
Gross profit 2,925 2,740
Operating expenses 2,645 2,195
Profit before interest and tax 380 545
Interest 60 80
Net profit before tax 320 465
Taxation 20 30
Profit after tax 300 435
THE STATEMENTS OF FINANCIAL POSITION AS AT 30 APRIL
2008 2009
$,000 $,000 $,000 $,000
Assets

Non-current assets 1,430 1,850

Current assets
Inventory 670 640
Receivables 900 1,230
Cash 120 80
1,690 1,950
Total assets 3,120 3,800
Equity and liabilities
Equity
Ordinary share capital 800 800
Retained earnings 930 1,310
1,730 2,110
Non current liabilities
10% Bonds payable 600 800
Current liabilities
Bank overdraft 80 110
Payables 690 750
Taxation 20 30
790 890
3,120 3,800
The following ratios are those calculated for DG, based on its published accounts for the previous year, and also
the latest industry average ratios:
DG Industry
30April 2008 average
Return On Capital Employed (ROCE) 16.30% 18.50%
Return On Assets (ROA) 12.17% 13.2%
Gross profit ratios 30.00% 35.23%
Net profit ratio 3.90% 4.73%
Return On Equity (ROE) 17.3% 18.5%
Current ratio 2.10 1.90
Quick ratio 1.52 1.27
Inventory turnover (times) 13.9x 18.30x
Asset turnover 3.1x 3x
Accounts receivable collection period 40 days 52 days
Accounts payable payment period 37 days 49 days

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

Required
a) Calculate comparable ratios (to two decimal places where appropriate) for DG for the year ended 30April
2009. All calculations must be clearly shown.
b) Write a report to your board of directors analyzing the performance of DG, comparing the results against
the previous year and against the industry average.

REPORT
To: Board of directors
From: Accountant
Subject: Analysis of performance of DG
This report should be read in conjunction with appendix attached which shows the relevant ratios (from part (a)).
• Profitability ratio
Both ROCE and ROA improved considerably between 2008 and 2009 and are now higher than the industry average. The higher
the return the more efficiently the capital is being employed within the business and assets are efficiently utilized in generation of
business profit.

The main causes for this seems to be the following

• Gross profit ratio however, is considerably lower than in the previous year and is now lower than the industry average this
suggests that may be there has been decrease in selling price in order to maximize sales. There is supporting evidence for this
in that the average Inventory turnover (22.86) has increased and is above the industry average, increases of inventory
turnover may indicate improved efficiency
• But the net profit ratio has improved noticeably between the years and is now higher than the industry average, this indicates
that operating expenses are being controlled well than the industry average.
• ROE has improved considerably between 2008 and 2009 and are now higher than the industry average. This suggests that
there is increase in shareholders return, the higher the return indicates that the management is working to maximize
shareholders wealth.

• Liquidity ratio
The current ratio has improved slightly over the year and is marginally higher than the industry average. It is also in line with what
is generally regarded as satisfactory (2:1). The quick ratio has declined marginally but is still better than the industry average. This
suggests that DG has no short term liquidity problems and should have no difficulty in paying its debts as they become due.

• Efficiency ratio
Receivable as a proportion of sales is unchanged from 2008 and are considerably lower than industry average. This may indicate
that the credit control policy is being applied more effectively than industry, The quicker the debtors pay their accounts
the better is. But this may results to customers going else where; Consequently, there may be pressure in the future from
customers to increase the period of credit given.

The period of credit taken from suppliers has fallen from 37 days purchases to 32 days and is much lower than the industry.

This indicates that the business is paying creditors more quickly, this increase trust with suppliers, also a business get advantage
of cash discount for early payments.

nventory turnover has increased and is higher than the industry average, this may indicate increase in demand and improved
efficiency of business activity.

The other component of ROCE is asset utilization as indicated by Assets turnover, the asset turnover has increased between the
periods and the 2009 figure is higher than the industry average. The increase might indicate efficiency use of assets or it might
indicate that the assets acquired in 2009 have fully contributed to business.

Signed: Accountant

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION FIVE
PART A
The trading stock of Joan street, retailer has been reduced during the year ended 31st
March 2018 by $6,000 from its commencing figure of $21,000. A number of financial ratios
and related statistics have been complied relating to the business of Joan street for the
year ended 31st march 2018. The following are the detailed information.
Joan street
%
Net profit as % net capital employed* 15
Net profit to Sales 9
Sales to Net capital employed 1662/3
Fixed assets to sales 45
Working capital ratio
Current assets 400
Current liabilities
Acid test ratio
Bank + debtors 275
Current liabilities
Gross profit to sales 25
Debtor’s collection period
Debtors x 365 361/2 days
Sales
Stock turnover (based on average stock for the year) 10times
Joan Street has supplied all the capital for her business and has had no drawings from
the business during the year ended 31 march 2018
Required
Prepare the statement of comprehensive income for the year ended 31march 2018 and the
statement of financial position as at that date of Joan street in as much detail as possible.

PART B
NASACO Ltd was completely destroyed by fire and all accounting and financial information was burnt.
However, on-going through the director of finance’s brief case which was salvaged by the owner, the
following key data for the accounts ended June 30, 2010 were found
i) Current ratio 1.75
ii) Liquid ratio 1.25
iii) Inventory turnover (cost of sales/closing stock) 9
iv) Gross profit ratio 25%
v) Debt collection period 11/2 months
vi) Reserves and profit and loss account to capital 2
vii) Turnover to fixed asset 1.2
viii) Capital gearing ratio 0.6
ix) Fixed asset to net worth 1.25
x) Sales for the tshs.1,200,000,000
REQUIRED Reconstruct the statement of financial position of NASSACO Ltd. as at June 30, 2010 using the
above information

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

QUESTION SIX
a) Define the term “borrowing costs” and explain the accounting treatment of such costs which
is required by international Accounting Standard IAS23.
b) Define the term Qualifying Asset
c) According to the IAS 23 – Borrowing Costs, explain the following
i) Borrowing costs eligible for capitalization
ii) Commencement of capitalization
iii) Suspension of capitalization
iv) Cessation of capitalization

Solution
a) Define the term “borrowing costs” and explain the accounting treatment of such costs which
is required by international Accounting Standard IAS23.
Borrowing costs are interest and other costs that an entity incurs in connection with the
borrowing of funds. “Borrowing costs comprise:
• Interest on bank overdrafts and on short-term and long-term borrowing
• Discount and premium related to borrowings
• Ancillary costs incurred in connection with the arrangement of the borrowings
• Finance charges in respect of finance leases

IAS 23 requires that borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of
that asset. Other borrowing costs should be recognized as an expense in the period in which
they are incurred.

b) Define the term Qualifying Asset

• Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale. Depending on the circumstances, any of the following may be
qualifying assets:
- Inventories that requires a substantial period of time to bring them to a saleable
condition
- Manufacturing plants
- Power generating facilities
- Investment properties
• Note: inventories produced over a short period of time are not qualifying assets. Nor assets
which are ready for their intended use or sale as soon as they are acquired.

c) According to the IAS 23 – Borrowing Costs, explain the following

(i) Borrowing costs eligible for capitalization
• Those borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are those borrowing costs which would be avoided if the
expenditure on the asset had not occurred
• Identifying these costs is straight forward if funds are borrowed specifically for this purpose.
In these circumstances, the borrowing costs eligible for capitalization in an accounting period
are the actual borrowing costs incurred on the borrowed funds during the period, less any
investment income arising if these funds are temporarily invested before being spent on the
qualifying asset.

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

• If a qualifying asset is funded out of a pool of general borrowings, the borrowing costs that
may be capitalized are calculated by applying a capitalization rate to the expenditure on the
asset. The capitalization rate is the weighted average of the borrowing costs that are
applicable to the general borrowings outstanding during the period

(ii) Commencement of capitalization

Three events or transactions must be taking place for capitalization of borrowing costs
to be started
1. Expenditure on asset is being incurred
2. Borrowing costs are being incurred
3. Activities are in progress that are necessary to prepare the asset for its intended use
or sale

(iii) Suspension of capitalization

• If active development is interrupted for any extended periods, capitalization of borrowing
costs should be suspended for those periods.
• Suspension of capitalization of borrowing costs is not necessary for temporary delays or for
periods when substantial technical or administrative work is taking place.

(iv) Cessationof capitalization

• Once substantially all activities necessary to prepare the qualifying asset for its intended use
or sale are complete, then capitalization of borrowing costs should cease. This will normally
be when physical construction of the asset is completed, although minor modifications may
still be outstanding. The asset may be completed in parts or stages, where each part can be
used while construction is still taking place on the other parts. Capitalization of borrowing
costs should cease for each part as it is completed. The example given by the standard is a
business park consisting of several buildings.

QUESTION SEVEN (NBAA Adapted)

Adora is publicly listed supermarket chain. During the current year it started the building of new
store. The directors are aware that in accordance with IAS 23 Borrowing costs certain borrowing
costs have to be capitalized
Details relating to the construction of Adora’s new store:
Adora issued a TAS10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 st
April 2018. The loan redeemable at a premium which means the loan has an effective finance cost
of 7.5% per annum. The loan was specifically issued to finance the building of the new store which
meets the definition of qualifying asset in IAS 23. Construction of the store commenced on 1 st
May 2018 and it was completed and ready for use on 28th February 2019, but did not open for
trading until 1st April 2019. During the year trading at Adora’s other stores was below expectations
so Adora suspended the construction of the new store for a two month period during July and
August 2018. The proceeds of the loan were temporarily invested for the month of April 2018
and earned interest of TAS40,000.
Required
Calculate the net borrowing cost that should be capitalized as part of the costs of the new store and
the finance cost that should be reported in the income statement for the year ended 31st March 2019.

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

SOLN
The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total finance cost for the year
ended 31 March 2010 is $750,000 ($10 million x 7·5%). As the loan relates to a qualifying asset, the finance cost (or
part of it in this case) can be capitalised under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (1 May 2009) and must cease
when the asset is ready for its intended use (28 February 2010); in this case a 10-month period. However,interest cannot be
capitalised during a period where development activity is suspended; in this case the two months of July and August 2009.
Thus only eight months of the year’s finance cost can be capitalised = $500,000 ($750,000 x 8/12). The remaining four-
months finance costs of $250,000 must be expensed. IAS 23 also says that interest earned from the temporary investment
of specific loans should be deducted from the amount of finance costs that can be capitalised. However, in this case, the
interest was earned during a period in which the finance costs were NOT being capitalised, thus the interest received of
$40,000 would be credited to the income statement and not to the capitalised finance costs.
In summary: $
Income statement for the year ended 31 March 2010:
Finance cost (debit) (250,000)
Investment income (credit) 40,000
Statement of financial position as at 31 March 2010:
Property,plant and equipment (finance cost element only) 500,000

QUESTION EIGHT
According to the IAS 2 – Inventory
a) Lists the items that comprise inventory.
b) How is inventory measured?
c) THREE (3) examples of costs which are specifically excluded
from the costs of inventories and instead are recognised as
expenses in the period in which they are incurred
d) THREE (3) situations in which net realisable value is likely to be
less than cost
e) A trader provided the following information about his stock at 30th November 2008
inventory Number of Cost per unit Selling price per unit
code number units in TSHS TSHS
inventory
BD 20 300 150 230
BD 23 119 95 80
BD 29 410 178 185
The trader had to pay carriage inwards on inventory Code Number BD 20 at the rate of TSHS5
per 100 units (not included in the cost per unit shown above).
Calculate the total value of inventory which should appear in the trader’s statement of financial
position on 30 November 2008. Show your calculations.

f) Davis Ltd’s closing inventory as at 31 December 2018 is Tshs347,841. This includes Tshs.4,640
for items accidentally destroyed on 31 December 2018 after the count was completed. Also
included is Tshs2,980 which relates to the cost of inventory damaged in October 2018, which
can be reworked at a cost of Tshs 680 and which can then be sold for Tshs 2,410.
Required:
Calculate the closing value of inventory at the year-end.

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

SOLUTION
a) Inventories can include any of the following.
• Goods purchased and held for resale, eg goods held for sale by a retailer, or land and
buildings held for resale
• Finished goods produced
• Work in progress being produced
• Materials and supplies awaiting use in the production process (raw materials)
b) Measurement of inventories
The standard states that 'Inventories should be measured at the lower of cost and net realisable value.'
This is application of the principle of prudence as overvaluing the stock causes both the profit and the
assets to be overvalued.
• Cost of inventory is the cost of conversion or actual purchase price plus any additional costs
incurred in bringing the stock to its present position and condition.
• Net realizable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.

c) The standard lists types of cost which would not be included in cost of
inventories instead; they should be recognized as expense in the period
they are incurred.
– Abnormal amount of wasted materials, labor or other production costs
– Storage costs (except which are necessary in the production process
before a further production stage)
– Administrative overheads not incurred to bring inventories to their
present location and conditions
– Selling costs

d) The principal situations in which net realisable value is likely to be

less than cost is where there has been;
• An increase in costs or a fall in selling price
• Physical deterioration of inventories
• Obsolescence of products
• A decision as part of a company’s marketing strategy to manufacture
and sell products at a loss
• errors in production or purchasing.

QUESTION NINE (NBAA Adapted)

(a) IAS 2: Inventories requires inventories of raw materials and finished goods to be valued
in financial statements at the lower of cost and net realizable value.
REQUIRED:
(i) Explain the rationale of the “lower of cost and net realizable value” principle. (4
marks)
(ii) Describe three methods of arriving at cost of inventories which are acceptable
under IAS 2 and explain how they are regarded as acceptable. (6 marks)

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FINANCIAL REPORTING (B2) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 2)

(b) SIMPLE is a manufacturer of garden furniture. The company has consistently used FIFO
method (first in first out) in valuing inventory, but it is interested to know the effect
valuation of using weighted average cost instead of FIFO on its inventory.
At 28th February 2013, the company had inventory of 4,000 standard plastic tables, and has computed its
value on each side of the two methods as:
Method Unit cost Total value (TZS.)
FIFO 16,000 64,000,000
Weighted average 13,000 52,000,000
During March 2013, the movements on the inventory of tables were as follows:
Received from factory:
Date Number of units Production cost per
unit (TZS.)
8th March 2013 3,800 15,000
22nd March 2013 6,000 18,000
Revenue/Sales
Date Number of units Price per unit

12th March 2013 5,000 30,000

18th March 2013 2,000 30,000
24th March 2013 3,000 32,000
28th March 2013 2,000 31,000
On FIFO basis the inventory on 31st March 2013 was TZS.32,400,000.
REQUIRED:
Compute the value of the inventory as at 31st March 2013 by using weighted average cost
method. (10 marks) (Total: 20 marks)
NB: In arriving at the total inventory value you should make calculations to two
decimal places (where necessary) and use the perpetual inventory system

ANSWER – Question One (NBAA Adapted November 2016)

(a) IAS 2 : Inventories requires inventories of raw materials and finished goods to be valued in financial statements at the
lower of cost and net realizable value.
(ii) Rationale of the “lower of cost and net realizable value”
The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly
or partially obsolete or if their selling prices have declined.
The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs
to be incurred to make the sale have increased.
The lower of cost and net realisable value principle also considered the prudence concept that require assets
and income not to be overstated (but liabilities and expenses can be overstated).
It then follows that if the cost of inventories is less than their net realizable value, the inventories have to be
valued at cost. If the net realizable value is less than cost, then the inventories have to be valued at net realizable
value.

(iii) Three acceptable methods of arriving at the cost of inventories under IAS 2:
Unit Cost
Under this method, inventories are priced at the actual amount paid for each individual item of inventory held
regardless of whether the items have been purchased or produced. However, this method is inappropriate for
a large number of items which are ordinarily interchangeable.

First-In-First-Out (FIFO) – Inventory is assumed to be composed of the items most recently purchased,
regardless of whether this is actually the case. Inventory is therefore valued according to the price paid for the
most recent purchase. If this purchase is insufficient to cover the quantity in inventory, the price of the next
most recent purchase is taken as necessary.

Average Cost – Inventory is priced at the moving weighted average price at which each inventory line was
purchased during the accounting period, or brought forward from the previous period.

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 PERFOMANCE MANAGEMENT
(B5) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 1)

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 PERFOMANCE MANAGEMENT
(B5) GRANDE FINALE SOLVING SESSION MAY 2023 (SET 1)

Godson Mkaro: [MSc Finance & Investment, BSc in Computer Science, ATEC II, CPBE, CISE, CCSP, CPA (T)],
Contacts: +255 717 348 616 | +255 769 348 616 | info@covenantfinco.com | www.covenantfinco.com Page | 1