Question 5 (15 marks)

Bravo Limited is a company popular for its customized and affordable household products. The

company uses FIFO method to account for its inventory. The year-end bonus for staff is calculated

based on the net income of the year. At the directors meeting, one of the directors suggested to

reduce the bonus to staff by using a different inventory costing method. Another director agreed

with this suggestion as the company may use different inventory costing method from year to

year to adjust the amount of year-end bonus for staff.

Required:

(a)

Comment on the suggestions made by the directors with reference to the accounting

principles in terms of financial implications and potential issues on financial statements.

(9 marks)

(b)

Identify the parties that will be affected by the above suggestions and explain how they

will be affected.

(6 marks)

Note: Your answer should be limited to 2 pages.