Question 1

SCENARIO: AgriSteel Heavy Industries manufactures specialized farming machinery. Draft financial statements for the year ended 30 September 20X6 show a draft net profit of $1,200,000. The following adjustments are needed:
1) Closing inventory was valued at cost $450,000, but includes damaged tractors costing $50,000 that can only be sold for $30,000 after $5,000 repair costs.
2) A machine bought for $200,000 on 1 Oct 20X5 was incorrectly charged to repairs. Depreciation is 20% reducing balance.
3) A provision for a legal claim of $80,000 needs to be created.
4) The allowance for receivables needs to increase by $15,000.

What is the impact of the inventory adjustment on the draft net profit?

Accepted Answer

Understand the relationship between closing inventory and profit. Lower closing inventory = higher cost of sales = lower profit.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Thinking that a reduction in inventory increases profit.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 3

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