Question 4 The directors of ABC Ltd are disappointed by the draft profit for the year ended 30 September 2010. The company's assistant accountant has suggested two areas where she believes the reported profit may be improved: 1. A major item of plant that cost GH 20 million to purchase and install on 1 October 2007 is being depreciated on a straight-line basis over a five-year period (assuming no residual value). The plant is wearing well and at the beginning of the current year (1 October 2009) the production manager believed that the plant was likely to last eight years in total (i.e. from the date of its purchase). The assistant accountant has calculated that, based on an eight-year life and no residual value) the accumulated depreciation of the plant at 30 September 2010 would be GH 7.5 million (GH 20 million/8 years * 3). In the financial statements for the year ended 30 September 2009, the accumulated depreciation was GH 8 million (GH 20 million/5 years x 2). Therefore, by adopting an eight-year life, ABC can avoid a depreciation charge in the current year and instead credit GH 0-5 million (GH 8 million-GH 7-5 million) to the income statement in the current year to improve the reported profit. (1.5 marks) 2. Most of ABC's competitors value their inventory using the average cost (AVCO) basis, whereas ABC uses the first in first out (FIFO) basis. The value of ABC's inventory at 30 September 2010 (on the FIFO basis) is GH 20 million, however on the AVCO basis it would be valued at GH 18 million. By adopting the same method (AVCO) as its competitors, the assistant accountant says the company would improve its profit for the year ended 30 September 2010 by GH 2 million ABC's inventory at 30 September 2009 was reported as GH 15 million, however on the AVCO basis it would have been reported as GH 13.4 million (1.5 marks) Required: Comment on the acceptability of the assistant accountant's suggestions and quantify how they would affect the financial statements if they were implemented under IAS 8. Ignore taxation