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ACCA · Question 59 · Preparing Basic Financial Statements
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:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
Draft Revenue is $2,000,000, Cost of Sales $1,200,000.
Calculate the revised Cost of Sales figure (in $).
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:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
Draft Revenue is $2,000,000, Cost of Sales $1,200,000.
Calculate the revised Cost of Sales figure (in $).
How to approach this question
The only adjustment affecting Cost of Sales is the closing inventory undervaluation. An increase in closing inventory decreases Cost of Sales. $1,200,000 - $15,000 = $1,185,000.
Full Answer
The draft Cost of Sales is $1,200,000. Adjustment 2 states closing inventory was undervalued by $15,000. Since Cost of Sales = Opening Inventory + Purchases - Closing Inventory, increasing the closing inventory by $15,000 decreases the Cost of Sales by $15,000. Revised Cost of Sales = $1,200,000 - $15,000 = $1,185,000. (Depreciation is usually an administrative/distribution expense unless stated as a production overhead).
Common mistakes
Adding the $15,000 to Cost of Sales instead of deducting it.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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