The disclosures with respect to inventory are shown for two companies. They were extracted from Note 1

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The disclosures with respect to inventory are shown for two companies. They were extracted from Note 1 of the financial statements describing accounting policies.

Company A At balance date, all inventories on hand or in transit are valued at the lower of cost and net realisable value. Cost is determined using the weighted average cost method, after deducting any purchase settlement discount, and including logistics expenses incurred in bringing the inventories to their present location and condition.

Company B Inventories, including work in progress, are valued at the lower of cost and net realisable value. Cost is determined principally on a first in, first out basis and, in the case of manufactured goods, includes direct materials, labour and production overheads.

1 What are the main differences in accounting policies for inventory between the two companies?

2 If all other things were equal (such as same sales or same expenses), which company would have the higher profit for the year and the higher inventory figure?

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Fundamentals Of Accounting And Financial Management

ISBN: 9780170454797

8th Edition

Authors: Professor Ken Trotman, Kerry Humphreys

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