Question
Safety International Ltd, a merchandising company was established in 2010, buying and selling vehicle airbags and airbags for babys car seats. The products are sold
Safety International Ltd, a merchandising company was established in 2010, buying and selling vehicle airbags and airbags for babys car seats. The products are sold all over the world, but mainly in Australia, New Zealand and the United States of America. Last year at the end of the financial year, 30 June 2016 board of directors meeting, questions were raised about the safety of vehicle airbags, as concerns had been raised by their customers in Australia and New Zealand. As the vehicle airbags are the main source of revenue for the company, management was concerned about the future of this business being in jeopardy. The company hired a new staff member, Steven, who has expertise in the area of airbags safety to advise management of the required changes to their products.
The modifications advised by Steven would increase the cost of sales, but also increase sales revenue at the same time. The chief accountant, Larry Wilson, assured the board of directors that by the end of financial year, 30 June 2017, the net profit would increase by more than 20%.
However, by the end of June 2017, Larry was notified that the companys profit forecast was not achievable. While Larry was concerned with the news, he suspected that the issue was mainly with how the inventory stocktake was calculated. He knew that a new junior accountant, Sally Gibbs, was employed during 2017 and was mainly in charge of completing a physical inventory count.
After talking to Sally, Larry found out that she had only counted and costed the items that were physically available in the companys warehouse and storage including the vehicle airbags that were on the shelves, in the receiving area, as well as the docking area, and not considering the vehicle airbags in transit. As the matter was important, Larry asked some of the other accountants to perform an audit of the inventory count. Larry asked them to go through the invoices received from purchases and receipts prepared for sales and figure out the number and cost of inventory sold and on hand for the year ended 30 June 2017.
Question 1.
The following information was revealed by the accountants that were performing the audit;
(a) There were goods in transit on 30 June 2017 from a supplier called PlasticCo Ltd, with terms EXW, costing $10,000. The goods were scheduled to arrive by July 21, 2017.
(b) On 27 June, a regular customer, Kemp Ltd, purchased air bags for cash amounting to $1,000 from Safety International Ltd. The goods were left in the Safety International Ltd warehouse by Kemp Ltd and were to be picked up on 4 July 2017.
(c) Office supplies were shipped to Safety International Ltd by Office Max, termed DDP. The goods were shipped on 29 June and received on 30 June.
(d) Sally on the date of the inventory count, received notice from a supplier that goods ordered earlier at a cost of $4,000, had been delivered to the transportation company on 28 June 2017. The terms were DDP. By 30 June 2017, the goods had not arrived at the warehouse.
(e) On 30 June, there was goods in transit to customers, with terms DDP, amounting to $800, with an expected delivery date of July 8, 2017.
(f) On 28 June, Safety International Ltd sold $2,500 worth of vehicle airbags to a customer, with the terms of EXW. The goods were in transit and were to arrive to the customers warehouse on 5 July.
(g) Bassett Furniture shipped office furniture to Safety International Ltd, DDP, on 29 June 2017. The goods were to be received on 3 July.
(h) By the end of financial year, Safety International Ltd, as the consignee, had goods available in their warehouse on consignment that cost $3,000.
As mentioned in the case study, Sally has not accounted for any vehicle airbags in transit. Based on the above additional information you are required to explain for each individual transaction if Sally should have or have not included the inventory in the stocktake. Explain your answer by referring to relevant accounting principles. For each individual transaction provided, has Sally understated or overstated the cost of ending inventory and cost of sales.
Question 2.
How does the timing in the recording of purchases and sales affect Safety International Ltds profitability?
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