Question 1

Section B - Case 2

Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
1) A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
2) Closing inventory was undervalued by $15,000.
3) An allowance for receivables of $8,000 needs to be created.
4) Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.

How does the undervaluation of closing inventory (adjustment 2) affect the draft profit?

Accepted Answer

Remember the formula: Cost of Sales = Opening Inventory + Purchases - Closing Inventory. If Closing Inventory goes up by $15,000, Cost of Sales goes down by $15,000. Lower expenses mean higher profit.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Thinking that an increase in an asset (inventory) is an expense that reduces profit.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 6

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