FUNDAMENTALS OF

FINANCIAL ACCOUNTING

Lecture Sheet
Accounts for Inventories
Session: July – December 2020

Instructor
Md. Sajjad Hossain
CMA (Final), MBA, BBA, LLB, PGDE
Proprietor – S Hossain & Co.
Income Tax Lawyer
Member - Dhaka Taxes Bar Association
Income Tax and Company Law Adviser
Author of so many remarkable books

NOBBODOY
DHAKA, BANGLADESH
Helpline : 017111-37039

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 TABLE OF CONTENTS

Particulars Page No.

1. ICMAB Syllabus Structure 02

2. Marks Distribution 03

3. Accounts for inventories 04

4. Problems and Solutions 14

5. Question Pattern 32

6. Mock Examination Question 33

1
 ICMAB SYLLABUS STRUCTURE

The syllabus comprises the following main topics with the relative study weightings:

Segment Topic Weight (%)

A Conceptual and regulatory framework 20

B Accounting systems 20

C Preparation of accounts for single entities 45

D Control of accounting systems 15

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 MARKS DISTRIBUTION

Chapter Title Page No.

1. Conceptual and regulatory framework 20%

Accounting systems

2. Double-entry Bookkeeping

3. Accounts for cash and bank, bank reconciliations 20%

Preparation of accounts for single entities

4. Accounts for Bad debts and receivables

5. Accounts for depreciation

6. Accounts for inventories 45%

7. Preparation of financial statements

8. Preparation of statement of cash flows

9. Use of basic ratios in financial performance

10. Control of accounting systems 15%

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 CHAPTER - 6
ACCOUNTS FOR INVENTORIES

6.1. DEFINITION OF INVENTORY

As per IAS 2, inventories are assets:

(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or
in the rendering of services.

Inventories encompass goods purchased and held for resale including merchandise
purchased by a retailer and held for resale, or land and other property held for resale.
Inventories also encompass finished goods produced or work-in-progress being
produced by the entity and include materials and supplies use in the production
process. In case of a service provider, inventories include the costs of service for
which the entity has not yet recognized related revenue.

6.2. TYPES OF INVENTORY

There are several types of inventory. We are discussing below three major types of
inventory.

Raw materials: Raw materials are inventory that are used in the manufacturing
process to produce a component. These are the commodity that the organization or
its subsidiary has produced. They also may be purchased from the outside market. If
the item is partially assembled or is considered as finished goods to the supplier (not
the buyer), the buyer may classify it as raw material. Example of raw materials are
ore, minerals, petroleum, chemicals, wood, paper, steel, food items, etc.

Work-in-process: Work-in-process is the materials that are being processed or

waiting to be processed within the system. It includes all materials that has been
released for initial processing and is considered as work-in-process up to inclusion
in finished goods. The materials that has been completed process and is awaiting for
final inspection is also known as work-in-process.

Finished goods: A finished good is a completed item that is ready for use. However,
finished goods is the stock of completed products. These goods have passed final
inspection requirements and they can be transferred out from work-in-process to
finished goods inventory. It can be sold directly to their final users.

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6.3. PERPETUAL AND PERIODIC INVENTORY SYSTEMS

Perpetual inventory is a method of accounting for inventory that records the sale or
purchase of inventory immediately through the use of computerized point-of-sale
systems and enterprise asset management software.

A periodic inventory system or the periodic inventory method is an accounting

method in which the amount of inventory is determined at the end of each
accounting period or in specified periods.

6.4. DISTINCTION BETWEEN PERPETUAL AND PERIODIC

INVENTORY SYSTEMS

Perpetual inventory system Periodic inventory system

(a) Under the perpetual inventory
system, there are continual updates to
either the general ledger or inventory
journal as inventory related
transactions occur.
(b) It is impossible to manually
maintain the records for a perpetual
inventory system, since there may be
thousands of transactions at the unit
level in every accounting period.
(c) A group of experienced permanent
employees is needed for the
application of the perpetual inventory
system.
(d) Under the perpetual system, there
are continual updates to the cost of
goods sold account as each sale is
made.
(e) Under the perpetual inventory
system, inventory purchases are
recorded in either the raw materials
inventory account or merchandise
account (depending on the nature of
the purchase), while there is also a
unit-count entry into the individual
record that is kept for each inventory
item.
(a) Under a periodic inventory system,
there is no cost of goods sold account
entry at all in an accounting period until
such time as there is a physical count,
which is then used to derive the cost of
goods sold.
(b) The simplicity of a periodic
inventory system allows for the use of
manual record keeping for very small
inventories.
(c) Under periodic inventory system, no
separate group of employees is needed
for the stocking purpose.
(d) Under the periodic inventory
system, the cost of goods sold is
calculated in a lump sum at the end of
the reporting period, by adding total
purchases to the beginning inventory
and subtracting ending inventory.
(e) Under a periodic inventory system,
all purchases are recorded into a
purchases asset account, and there are
no individual inventory records to
which any unit-count information could
be added.

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6.5. ADVANTAGES OF PERPETUAL INVENTORY SYSTEM

Easier method:
Perpetual inventory system is the easier and more convenient methods to keep
control over merchandise inventory. It is easy to maintain and suitable for large
organization. Many companies use this system - especially those using a job order
cost accounting system, or selling many different types of inventory.

Immediately identify balance:

In a perpetual inventory system, inventories are recorded when purchased or sold.
This enables an organization to immediately identify inventory balances that are
running low. It also prevents being out-of-stock and losing customers because of it.

Prevents count error:

In a periodic inventory system, the year-end inventory balance is adjusted to agree to
the physical inventory count. This prevent any theft, shrinkage or even count errors
as the adjustment is transferred to the account for the cost of goods sold.

Produces accurate financial statement:

Under perpetual inventory system, inventory value does not change during the year.
As a result, both the inventory account on the balance sheet and the cost-of-goods-
sold account on the profit and loss statement are incorrect throughout the year. A
perpetual system keeps those balances correct and gives more accurate set of
financial statements throughout the year.

Provides correct turnover ratio:

Under perpetual inventory system, the inventory turnover ratio can be calculated
correctly. The turnover ratio tells a business owner whether sales are slowing down
or whether individual products are no longer selling quickly.

6.6. DISADVANTAGES OF PERPETUAL INVENTORY SYSTEM

Setup cost:
One disadvantage of a perpetual inventory system involves the setup cost. Most
systems require the purchase of new equipment and inventory software. Perpetual
inventory systems also add to labor costs since all inventory must be entered into the
system.

Training on equipment:
Another disadvantage to implementing a perpetual inventory system involves the
increased level of training required. Employees need to know how to operate the
new equipment and inventory software. Accounting personnel need training to
operate the inventory system.

6
False reliability:
Perpetual inventory systems can be misleading when reviewing inventory levels.
Employees can make mistakes entering quantities or recording the wrong inventory
item.

Monitoring cost:
To overcome employee errors or customer theft, it needs continuous monitoring.
Security monitors typically need to be installed and some companies hire security
personnel. It needs to bear additional costs to maintain the system properly and
effectively.

6.7. ADVANTAGES OF PERIODIC INVENTORY SYSTEM

Easy to implement:
It is remarkably easy to implement. If an organization looks for easiest inventory
system, then the periodic inventory system is considered to be absolutely perfect.
One can add this system to his/her business at any time. Certainly, it is less stressful
than any other option for maintaining inventory. Most businesses that work with this
system will roll it out once a year.

Cheap to implement:
To implement this inventory system, an organization needs not to invest in costly
software solutions. Technically, it doesn‟t have to invest much of anything, except
for the time involved in taking a physical inventory. Furthermore, as long as an
organization is willing to put in that time, its costs are never technically going to go
up either.

Suitable for smaller businesses:

Small businesses with homogeneous inventory and high inventory turnover can use
periodic inventory systems easily, larger businesses can use this system, too. In this
system, inventories are not recorded when purchased or sold. In periodic system,
inventories are recorded after a particular time period, i.e, weekly, monthly. So few
persons are required to maintain this system.

Easy record keeping:

The only records needed on a monthly basis for periodic inventory are the total
materials purchased and total goods sold. No accounting records for inventory
counts are needed. The only physical records that are kept come from the annual
inventory count completed at the year-end accounting period.

Best uses:
Under this method, inventories can maintain with few journal entries to the general
ledger. It also allows businesses to focus on selling inventory, rather than using
personnel to continually count the inventory for accuracy. Larger businesses can
benefit from periodic inventory systems as well, although the amount of inventory
will create longer annual physical counts and larger adjustments at year-end.

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6.8. DISADVANTAGES OF PERIODIC INVENTORY SYSTEM

(a) Inaccuracy:
One of the main disadvantages of periodic inventory system is the fact that it deals
with something that can be highly inaccurate. It can‟t ensure accuracy at all times.
For small businesses, this may not be a problem, However, larger businesses are
need to be aware when they use this system, inaccuracies aren‟t the norm, but they
aren‟t rare either.

(b) Difficult to handle correctly:

When a business grows, periodic inventory system can prove to be highly
problematic. Taking a physical inventory can amount to a time demand that the
business really shouldn‟t try to meet. Particularly with small businesses, it can be
challenging to find the time and energy to make sure a periodic inventory system is
handled correctly.

(c) Fails to exercise control:

One more thing to consider is that exercising control over inventory is something
that is going to become a good deal more difficult. The business fails to know how
many inventory it owns till a particular period. As a result, exercising control over
inventory becomes more difficult.

(d) Information are not up-to-dated:

Periodic inventory is only updated after a certain amount of time. Normally, this is
around inventory time. Companies manually count their inventory on a weekly,
monthly, bi-yearly or even yearly basis. This means that in terms of the books, the
information is not regularly updated. The records do not change, even when the
product is shipped or received.

(e) Theft can be undetected:

Product theft can be very difficult to notice in a periodic inventory system. Some
theft will not hurt a business with several different low-cost items, but for a business
that sells only valuable items the periodic system is not ideal.

6.9. BEST METHOD OF INVENTORY SYSTEM

The perpetual inventory system is the most popular choice for modern businesses.
This system was created when customer transactions could be completed with a
digital scanner, which sends information about every sale directly to a central
computer. When a product is sold, the computer system knows that there is one
fewer item in the businesses inventory, and it can deduct that amount from the total
number of products in stock.

This method requires computer software, such as Fishbows or Inflow, for owners to
access details about their inventory. The proper software can alert owners when
product amounts are low, or it may even order items automatically. Once it is

8
operational, this method helps prevent human error and keeps a continuous count of
every item in stock.

This method also suffer from some drawbacks. The drawback to perpetual inventory
system is the initial startup cost. In order to work correctly, multiple scanners,
computers, and software must be purchased before any sales can be calculated.
There are also barcode expenses, which must be placed on each product, and time
spent when initially entering the business‟s products into the computer system.

However, it is considered as best method of inventory system.

6.10. INVENTORY VALUATION METHOD

An inventory valuation allows a company to provide a monetary value for items that
make up their inventory. Inventories are usually the largest current asset of a
business, and proper measurement of them is necessary to assure accurate financial
statements. If inventory is not properly valued, expenses and revenues cannot
provide actual scenario of financial information and a company could make poor
business decisions. The most commonly used inventory valuation methods are as
follows:

(a) First-in, first-out (FIFO):

The First-in, first-out (FIFO) formula assumes that the items of inventory that were
purchased or produced first are sold first, and consequently the items remaining in
inventory at the end of the period are those most recently purchased or produced. An
entity shall use the same cost formula for all inventories having a similar nature and
use to the entity. For inventories with a different nature or use, different cost
formulas may be justified.

(b) Last-in, first-out (LIFO):

It is a method for inventory valuation, meaning that the most recently received items
are the first to be taken out of a warehouse. This method of inventory valuation
assumes that the last costs incurred to purchase merchandise or direct materials are
first costs charged against revenues. In other words, it assumes that the cost of
merchandise sold or the cost of materials issued to production department is the cost
of most recent purchases.
(c) Weighted average:
Under the weighted average cost formula, the cost of each item is determined from
the weighted average of the cost of similar items at the beginning of a period and the
cost of similar items purchased or produced during the period. The average may be
calculated on a periodic basic, or as each additional shipment is received, depending
upon the circumstances of the entity.
(d) Specific identification:
Specific identification of cost means that specific costs are attributed to identified
items of inventory. This is the appropriate treatment for items that are segregated for

9
a specific project, regardless of whether they have been bought or produced.
However, specific identification of costs is inappropriate when there are large
numbers of items of inventory that are ordinarily interchangeable. In such
circumstances, the method of selecting those items that remain in inventories could
be used to obtain predetermined effects on profit or loss.

6.11. MEASUREMENT OF INVENTORY

Generally Accepted Accounting Principles (GAAP) require that inventory should be

measured at the lower of cost and Net Realisable Value (NRV).

(a) Cost:
The cost of inventories include all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition.

Service providers include the labour and other costs that are directly related in
providing the service, including supervisory personnel and attributable overheads, in
determining the cost of inventories. Labour and other costs relating to sales and
general administrative are not included in the cost of inventories but are recognised
as expenses in the period in which they are incurred. The service provider does not
include profit margins or non-attributable overheads to the cost of inventories.

Costs of purchase: The costs of purchase of inventories include the purchase price,
import duties and other taxes (other than those subsequently recoverable by the
entity from the taxing authorities), and transport, handling and other costs directly
attributable to the acquisition of finished goods, materials and services. Trade
discounts, rebates and other similar items can be deducted in determining the costs
of purchase.

Costs of conversion: The costs of conversion of inventories include direct labour

costs and fixed and variable production overheads that are incurred in converting
materials into finished goods. Fixed production overheads are those indirect costs of
production that remain constant regardless of the volume of production, such as
depreciation and variable production overheads are those indirect costs of
production that vary directly with the volume of production, such as indirect
materials and indirect labour.

Other costs: Other costs are included in the cost of inventories only to the extent
that they are incurred in bringing the inventories to their present location and
condition. For example, it may includes non-production overhead or the costs of
designing products for specific customers in the cost of inventories.

(b) Net Realisable Value (NRV):

Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and disposal and other estimated costs
necessary to make the sale.

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6.12. LOWER OF COST OR MARKET

Lower of Cost or Market (LCM) is an accounting rule for valuing and reporting
inventory and under certain conditions, securities holdings. Under the Lower of Cost
or Market rule, inventory should be valued, at the end of an accounting period, as
the lower of cost or market value.

(a) Cost of inventories:

The cost of inventories include all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition.

Service providers include the labour and other costs that are directly related in
providing the service, including supervisory personnel and attributable overheads, in
determining the cost of inventories. Labour and other costs relating to sales and
general administrative are not included in the cost of inventories but are recognised
as expenses in the period in which they are incurred. The service provider does not
include profit margins or non-attributable overheads to the cost of inventories.

(b) Market value:

Market value is the price an asset would fetch in the open marketplace. It is
determined by fluctuations in supply and demand. It should be noted that market
value represents what someone is willing to pay for an asset, not the value it is
offered for or intrinsically worth.

6.13. RECOGNITION OF INVENTORY

When inventories are sold, the carrying amount of those inventories shall be
recognised as an expense in the period in which the related revenue is recognised.
The amount of any write-down of inventories to net realisable value and all losses of
inventories shall be recognised as an expense in the period the write-down of loss
occurs. The amount of any reversal of any write-down of inventories, arising from
an increase in net realisable value, shall be recognised as a reduction in the amount
of inventories recognised as an expense in the period in which the reversal occurs.

Some inventories may be allocated to other asset accounts, for example, inventory
used as a component of self-constructed property, plant or equipment. Inventories
allocated to another asset in this way are recognised as an expense during the useful
life of that asset.

6.14. RETAIL INVENTORY METHOD

The retail inventory method permits the estimation of inventory position whenever
desired. This method of inventory is based on the relationship between the cost of
merchandise and its retail price. The retail inventory method is sometimes used by
retailers that resell merchandise to estimate their ending inventory balances. The
method is not entirely accurate, and so should be periodically supplemented by a

11
physical inventory count. Its results are not adequate for the year-end financial
statements, for which a high level of inventory record accuracy is needed. To
determine the value of ending inventory using retail inventory method following
steps should be followed:
(i) Determine the retail value of goods available for sale during the period by adding
the retail value of beginning inventory and retail value of goods purchased.
(ii) Subtract total sales during the period from the retail value of goods available for
sale.
(iii) Calculate the cost to retail ratio. It is calculated using the following formula:
A B
CD
Here,
A = Cost of beginning inventory;
B = Cost of inventory purchased including incidental costs such as freight-in;
C = Retail value of beginning inventory; and
D = Retail value of goods purchased during the period
(iv) Multiply the difference obtained in step (ii) and the cost to retail ratio to obtain
estimated cost of ending inventory.

Illustration:
Cost Retail
Beginning inventory Tk.3,000 (A) Tk.4,000 (C)
Purchase Tk.2,000 (B) Tk.3,000 (D)
Goods available for sale Tk.5,000 Tk.7,000
Less: Sales Tk.2,000
Ending inventory at retail Tk.5,000

A B
Cost percentage =
CD
Tk.5,000
=
Tk.7,000
= 71.43%

Inventory balance = Tk.5,000 X 71.43%

= Tk.3,572

6.15. DISCLOSURE

The financial statements shall disclose the followings:

(a) the accounting policies and the cost formula used in measuring inventories;
(b) the total carrying amount of inventories appropriate to the entity;
(c) the fair value of inventories reduced by cost of sale;
(d) the amount of inventories recognised as an expense during the period;

12
(e) the amount of write-down of inventories recognised as an expense during the
period;
(f) the amount of reversal of any write-down that is recognised as a reduction in the
amount of inventories recognised as expense in the period;
(g) the circumstances that lead to the reversal of a write-down of inventories;
(h) the carrying amount of inventories pledged as security for liabilities.

13
PROBLEMS AND SOLUTIONS

P-1. [LCNRV Principle] The inventory of Omega Company on December 31,

2015, consists of the following items:

Part No. Quantity Cost per unit NRV per unit

110 600 Tk.95 Tk.100
111 1,000 60 52
112 500 80 76
113 200 170 180
120 400 205 208
121a 1,600 16 1
122 300 240 235
a
Part No. 121 is obsolete and has a realizable value of Tk.1 each as scrap.

Required:
Determine the value of inventory to be reported as of December 31, 2015, by
applying the LCNRV principle as per IAS-2.
CMA Adapted – December 2019
Solution:
Omega Company
Determination of the value of inventory
By applying LCNRV principle

Part No. Quantity Cost per NRV per Total cost Total NRV Lower of
unit unit cost or
NRV
110 600 Tk.95 Tk.100 Tk.57,000 Tk.60,000 Tk.57,000
111 1,000 60 52 60,000 52,000 52,000
112 500 80 76 40,000 38,000 38,000
113 200 170 180 34,000 36,000 34,000
120 400 205 208 82,000 83,200 82,000
121 1,600 16 1 25,600 1,600 1,600
122 300 240 235 72,000 70,500 70,500
Total 370,600 341,300 335,100

P-2. [LCNRV Principle] Hypo Company is a retailer that produces and sells four
major products: Q, R, S and T. At June 30, 2019, quantity on hand, cost per unit and
Net Realizable Value (NRV) per unit of the product lines are as follows:

Products Quantity on hand Cost per unit NRV per unit

(pcs) (Tk.) (Tk.)
Q 10 250 200
R 20 100 150

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 S 30 300 400
T 40 200 150

Required:
Compute the value of inventory at June 30, 2019, under IAS-2 using “Lower of Cost
and NRV principle”.

Solution:
Hypo Company
Computation of the value of inventory
Under IAS-2 using Lower of Cost and NRV principle
At June 30, 2019

Products Cost NRV Value of inventory

(Tk.) (Tk.) (Tk.)
Q 2,500 2,000 2,000
R 2,000 3,000 2,000
S 9,000 12,000 9,000
T 8,000 6,000 6,000
Total 19,000

P-3. [LCM Method] From the following information, determine the value of
inventory:

Food Cost Replacement Net realizable Net realizable

cost value (ceiling) value (floor)
Spinach Tk.80,000 Tk.88,000 Tk.120,000 Tk.104,000
Carrots 100,000 90,000 100,000 70,000
Beans 50,000 45,000 40,000 27,500
Peas 90,000 36,000 72,000 48,000
Mixed vegetables 95,000 105,000 92,000 80,000

Solution:
Calculation of the value of inventory by applying LCM

Item Cost Replacement NRV NRV – Designated Value of

(Tk.) Cost (Tk.) Profit Market inventory
(Tk.) (Floor) Value (Tk.)
(Tk.) (Tk.)
Spinach 80,00 88,000 120,000 104,000 104,000 80,000
Carrots 100,000 90,000 100,000 70,000 90,000 90,000
Beans 50,000 45,000 40,000 27,500 40,000 40,000
Peas 90,000 36,000 72,000 48,000 48,000 48,000
Mixed
vegetables 95,000 105,000 92,000 80,000 92,000 92,000
Total 350,000

15
P-4. [LCM Method] Royal Company has the following items as inventory as on
June 30, 2019. Determine the value of inventory by applying Lower of Cost and
Market. The company‟s normal profit margin is 10% of cost.

Items M N Q R
Cost (Tk.) 100 300 200 400
Replacement cost (Tk.) 150 250 300 350
Estimated selling price (Tk.) 320 600 500 550
Cost of completion and disposal (Tk.) 200 300 400 350

Solution:
Royal Company
Determination of the value of inventory
By applying Lower of Cost and Market
As of June 30, 2019

Items Cost Replacement NRV Floor Designated Value of

(Tk.) cost (Tk.) (Tk.) (Tk.) market inventory
value (Tk.) (Tk.)
M 100 150 120 110 120 100
N 300 250 300 270 270 270
Q 200 300 100 80 100 100
R 400 350 200 160 200 200
Total 670
Here,
NRV = Estimated selling price – Estimated costs of completion and disposal
Floor = NRV - Normal profit margin

Q-5. [Perpetual Method] You are provided with the following information for PQ
Inc. for the month ended October 31, 2018. PQ uses the perpetual method for
inventory.

Date Description Unit Unit cost or selling Price

October 1 Beginning inventory 60 Tk.25
9 Purchase 120 Tk.26
11 Sales 100 Tk.35
17 Purchase 70 Tk.27
22 Sale 60 Tk.40
25 Purchase 80 Tk.28
29 Sales 110 Tk.40

Required:
Calculate (a) Ending inventory, (b) Cost of goods sold, (c) Gross profit, and (d)
Gross profit rate under FIFO method.
CMA Adapted – June 2019

16
Solution:

(a)
PQ Inc.
FIFO method

Date Purchases Sales Balance

Units Rate Amount Units Rate Amount Units Rate Amount
(Tk.) (Tk.) (Tk.) (Tk.) (Tk.) (Tk.)
Oct.1 60 25 1,500
Oct.9 120 26 3,120 60 25 1,500
120 26 3,120
Oct.11 100 35 3,500 80 26 2,080
Oct.17 70 27 1,890 80 26 2,080
70 27 1,890
Oct.22 60 40 2,400 20 26 520
70 27 1,890
Oct.25 80 28 2,240 20 26 520
70 27 1,890
80 28 2,240
Oct.29 ___ ____ 110 40 4,400 60 28 1,680
Total 270 7,250 270 10,300 60 1,680

Ending inventory = Tk.1,680

(b)

Cost of goods available for sale Tk.8,750

Less: Ending inventory (Tk.1,680)
Cost of goods sold Tk.7,070

(c)

Net sales Tk.10,300

Less: Cost of goods sold (Tk.7,070)
Gross profit Tk.3,230

(d)
Gross profit
Gross profit rate = X 100
Net sales
Tk.3,230
= X 100
Tk.10,300
= 31%

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P-6. [Perpetual Method] You are given the following information regarding the
movements of inventory during April 2019:

Opening inventory is zero

Purchases:
3 April 22 units @ Tk.4 each
14 April 14 units @ Tk.7 each
21 April 16 units @ Tk.5 each
25 April 18 units @ Tk.6 each

Sales:
7 April 10 units @ Tk.15 each
23 April 15 units @ Tk.15 each
28 April 21 units @ Tk.15 each

Instruction:
From the above information you are required to prepare store ledger card and trading
account using the followings methods:
(a) FIFO;
(b) LIFO;
(c) Weighted average.

Solution:

(a)
Store Ledger Card
FIFO Method

Date Purchases Sales Balances

Units Tk./ Tk. Units Tk./ Tk. Units Tk./ Tk.
Unit Unit Unit
1 Apr 0 0 0
3 Apr 22 4 88 22 4 88
7 Apr 10 4 40 12 4 48
12 4 48
14 Apr 14 7 98 14 7 98
23 Apr 12 4 48
3 7 21 11 7 77
11 7 77
25 Apr 18 6 108 18 6 108
28 Apr 11 7 77
__ ___ 10 6 60 8 6 48
Total 54 294 46 246 8 48

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 Trading Account

Tk. Tk.
Sales (46 units @ Tk.15) 690
Less: Cost of sales:
Opening inventory 0
Add: Purchases 294
294
Less: Closing inventory (48)
246
Gross profit 444

(b)
Store Ledger Card
LIFO Method

Date Purchases Sales Balances

Units Tk./ Tk. Units Tk./ Tk. Units Tk./ Tk.
Unit unit unit
1 Apr 0 0 0
3 Apr 22 4 88 22 4 88
7 Apr 10 4 40 12 4 48
12 4 48
14 Apr 14 7 98 14 7 98
23 Apr 14 7 98
1 4 4 11 4 44
11 4 44
25 Apr 18 6 108 18 6 108
28 Apr 18 6 108
__ ___ 3 4 12 8 4 32
Total 54 294 46 262 8 32

Trading Account

Tk. Tk.
Sales (46 units @ Tk.15) 690
Less: Cost of sales:
Opening inventory 0
Add: Purchases 294
294
Less: Closing inventory (32)
262
Gross profit 428

19
(c)
Store Ledger Card
Weighted Average Method

Date Purchases Sales Balances

Units Tk./ Tk. Units Tk./ Tk. Units Tk./ Tk.
Unit Unit unit
1 Apr 0 0 0
3 Apr 22 4 88 22 4 88
7 Apr 10 4 40 12 4 48
14 Apr 14 7 98 26 5.62 146
23 Apr 15 5.62 84 11 5.62 62

25 Apr 18 6 108 29 5.86 170

28 Apr __ ___ 21 5.86 123 8 5.86 47
Total 54 294 46 247 8 47

Trading Account

Tk. Tk.
Sales (46 units @ Tk.15) 690
Less: Cost of sales:
Opening inventory 0
Add: Purchases 294
294
Less: Closing inventory (47)
247
Gross profit 443

P-7. [Perpetual Method] First Company uses a perpetual inventory system for its
product. Its beginning inventory, purchases, and sales during the year 2019 are as
follows:

Date Particulars Purchases Sales Balances

Jan.1 Purchases 200 units @ Tk.10 = Tk.2,000 200 units
Feb.1 Sales 100 units @ Tk.20 100 units
Mar.1 Purchases 300 units @ Tk.20 = Tk.6,000 400 units
Apr.1 Sales 350 units @ Tk.40 50 units
May 1 Purchases 100 units @ Tk.15 = Tk.1,500 150 units
Total 600 units = Tk.9,500 450 units

Additional information for applying specific identification:

(a) February 1 sale – 100 units @ Tk.10;
(b) April 1 sale – 80 units @ Tk.10, and 270 units @ Tk.20.

20
Required:
Calculate the ending inventory and cost of goods sold under LIFO, FIFO, weighted
average and specific identification method.

Solution:
First Company
Perpetual Inventory System
LIFO method:

Date Purchases Sales Balances

2019
Jan. 1 200 @ 10 = 2,000 200 @ 10 = 2,000
Feb. 1 100 @ 10 = 1,000 100 @ 10 = 1,000
100 @ 10 = 1,000
Mar. 1 300 @ 20 = 6,000 300 @ 20 = 6,000
Apr. 1 300 @ 20 = 6,000
50 @ 10 = 500 50 @ 10 = 500
50 @ 10 = 500
May 1 100 @ 15 = 1,500 100 @ 15 = 1,500
Cost of goods sold Ending inventory
= Tk.7,500 = Tk.2,000

FIFO method:

Date Purchases Sales Balances

2019
Jan. 1 200 @ 10 = 2,000 200 @ 10 = 2,000
Feb. 1 100 @ 10 = 1,000 100 @ 10 = 1,000
100 @ 10 = 1,000
Mar. 1 300 @ 20 = 6,000 300 @ 20 = 6,000
Apr. 1 100 @ 10 = 1,000
250 @ 20 = 5,000 50 @ 20 = 1,000
50 @ 20 = 1,000
May 1 100 @ 15 = 1,500 100 @ 15 = 1,500
Cost of goods sold Ending inventory
= Tk.7,000 = Tk.2,500

Weighted average method:

Date Purchases Sales Balances

2019
Jan. 1 200 @ 10 = 2,000 200 @ 10 = 2,000
Feb. 1 100 @ 10 = 1,000 100 @ 10 = 1,000
Mar. 1 300 @ 20 = 6,000 400 @ 17.50 = 7,000
Apr. 1 350@17.50 = 6,125 50 @ 17.50 = 875

21
 May 1 100 @ 15 = 1,500 150 @ 15.83 = 2,375
Cost of goods sold Ending inventory
= Tk.7,125 = Tk.2,375

Specific identification method:

Date Purchases Sales Balances

2019
Jan. 1 200 @ 10 = 2,000 200 @ 10 = 2,000
Feb. 1 100 @ 10 = 1,000 100 @ 10 = 1,000
100 @ 10 = 1,000
Mar. 1 300 @ 20 = 6,000 300 @ 20 = 6,000
Apr. 1 80 @ 10 = 800 20 @ 10 = 200
270 @ 20 = 5,400 30 @ 20 = 600
20 @ 10 = 200
30 @ 20 = 600
May 1 100 @ 15 = 1,500 100 @ 15 = 1,500
Cost of goods sold Ending inventory
= Tk.7,200 = Tk.2,300

P-8. [Perpetual Method] A Corporation that uses a perpetual inventory system has
the following transactions during June:
June-1 Opening balance 200 units @ Tk.3.00 per unit
June-2 Purchased 500 units @ Tk.3.20 per unit
June-7 Issued 400 units
June-11 Purchased 300 units @ Tk.3.30 per unit
June-14 Issued 400 units
June-17 Purchased 400 units @ Tk.3.20 per unit
June-21 Issued 200 units
June-24 Purchased 300 units @ Tk.3.40 per unit
June-26 Purchased 400 units @ Tk.3.50 per unit
June-29 Issued 600 units

Sales were 1,600 units @ Tk.7.00 per unit; marketing and administrative expenses
totaled Tk.2,100.

Required:
(a) Prepare a comparative income statement based on the transactions for June, using
LIFO and FIFO methods and a 40% income tax rate.
(b) For each costing method, determine the cash position at the end of June,
assuming that all transactions, purchases, sales, and non-manufacturing expenses
were paid in cash.

Solution:

22
(a)

LIFO method:

Date Purchases Issues Balances

June-1 200@ 3.00 = Tk.600
200@ 3.00 = Tk.600
June-2 500@ 3.20=Tk.1,600 500@ 3.20=Tk.1,600
200@ 3.00 = Tk.600
June-7 400@ 3.20=Tk.1,280 100@ 3.20=Tk.320
200@ 3.00 = Tk.600
100@ 3.20=Tk.320
June-11 300 @3.30=Tk.990 300@ 3.30=Tk.990
June-14 300@ 3.30=Tk.990 200@ 3.00 = Tk.600
100@ 3.20=Tk.320
200@ 3.00 = Tk.600
June-17 400@ 3.20=Tk.1,280 400@ 3.20=Tk.1,280
200@ 3.00=Tk.600
June-21 200@ 3.20=Tk.640 200@ 3.20=Tk.640

200@ 3.00=Tk.600
200@ 3.20=Tk.640
June-24 300@ 3.40=Tk.1,020 300@ 3.40=Tk.1,020
200@ 3.00=Tk.600
200@ 3.20=Tk.640
300@ 3.40=Tk.1,020
June-26 400@ 3.50=Tk.1,400 400@ 3.50=Tk.1,400
200@ 3.00=Tk.600
June-29 400@ 3.50=Tk.1,400 200@ 3.20=Tk.640
200@ 3.40=Tk.680 100@ 3.40=Tk.340
Purchases = Tk.6,290 Cost of goods sold Ending inventory
= Tk.5,310 = Tk.1,580

FIFO method:

Date Purchases Issues Balances

June-1 200@ 3.00 = Tk.600
200@ 3.00 = Tk.600
June-2 500@ 3.20=Tk.1,600 500@ 3.20=Tk.1,600
June-7 200@ 3.00=Tk.600
200@ 3.20=Tk.640 300@ 3.20=Tk.960
300@ 3.20=Tk.960
June-11 300@ 3.30=Tk.990 300@ 3.30=Tk.990
June-14 300@ 3.20=Tk.960
100@ 3.30=Tk.330 200@ 3.30 = Tk.660

23
 200@ 3.30 = Tk.660
June-17 400@ 3.20=Tk.1,280 400@ 3.20=Tk.1,280
June-21 200@ 3.30=Tk.660 400@ 3.20=Tk.1,280
400@ 3.20=Tk.1,280
June-24 300@ 3.40=Tk.1,020 300@ 3.40=Tk.1,020
400@ 3.20=Tk.1,280
300@ 3.40=Tk.1,020
June-26 400@ 3.50=Tk.1,400 400@ 3.50=Tk.1,400

June-29 400@ 100@ 3.40=Tk.340

3.20=Tk.1,280 400@ 3.50=Tk.1,400
200@ 3.40=Tk.680
Purchases = Tk.6,290 Cost of goods sold Ending inventory
= Tk.5,150 = Tk.1,740

Comparative Income Statement

For the month of June

LIFO method FIFO method

Sales (1,600 units @ Tk.7.00) Tk.11,200 Tk.11,200
Less: Cost of goods sold 5,310 5,150
Gross profit 5,890 6,050
Less: Marketing and administrative expenses 2,100 2,100
Profit before tax 3,790 3,950
Less: Income tax @ 40% 1,516 1,580
Net profit 2,274 2,370

(b)
Cash Position
At the end of June

LIFO method FIFO method

Sales (1,600 units @ Tk.7.00) Tk.11,200 Tk.11,200
Less: Purchases 6,290 6,290
Marketing and administrative expenses 2,100 2,100
Cash balance 2,810 2,810

P-9. [Periodic Method] You are provided with the following information for ABC
Company for the month ended June 30, 2019:
Date Particulars Quantity Unit cost or selling Price
Jan.1 Beginning Inventory 40 Tk.20
Feb.1 Purchases 60 Tk.15
Mar.1 Sales 80 Tk.10
Apr.1 Sales Return 20 Tk.10
May1 Purchases 30 Tk.40
May1 Purchases Return 10 Tk.20

24
Required:
Calculate the ending inventory and cost of goods sold under the following methods
by considering periodic inventory system:
(a) LIFO;
(b) FIFO; and
(c) Average cost.

Solution:
ABC Company
Periodic inventory system

Cost of goods available for sale:

Jan. 1 40 units @ Tk.20 = Tk.800

Feb. 1 60 units @ Tk.15 = Tk.900
May 1 30 units @ Tk.40 = Tk.1,200
May 1 (10) units @ Tk.40 = (Tk.400)
120 units = Tk.2,500

Inventory on hand = 120 units - (80 - 20) units

= 120 units – 60 units
= 60 units

(a) LIFO method:

Ending inventory
Jan. 1 40 units @ Tk.20 = Tk.800
Feb. 1 20 units @ Tk.15 = Tk.300
Tk.1,100

Cost of goods sold = Tk.2,500 – Tk.1,100

= Tk.1,400

(b) FIFO method:

Ending inventory
May 1 20 units @ Tk.40 = Tk.800
Feb. 1 40 units @ Tk.15 = Tk.600
Tk.1,400

Cost of goods sold = Tk.2,500 – Tk.1,400

= Tk.1,100

25
(c) Average cost method:

Tk.2,500
Average cost per unit =
120 units
= Tk.20.83

Ending inventory = 60 units X Tk.20.83

= Tk.1250

Cost of goods sold = Tk.2,500 – Tk.1,250

= Tk.1,250

P-10. [Periodic Method] The following data are related to Dragon Company‟s
beginning inventory, purchases, and sales for the year 2019.

Beginning inventory 10,000 units @ Tk.2.00

Purchases:
February 1 5,000 units @ Tk.3.00
April 2 8,000 units @ Tk.4.00
June 8 4,000 units @ Tk.5.00

Sales:
March 1 12,000 units
May 7 9,000 units
July 6 1,000 units

Required:
Compute the ending inventory and cost of goods sold under each of the following
methods assuming periodic inventory procedure:
(a) FIFO, (b) LIFO, and (c) Weighted average.

Solution:
Dragon Company
Periodic inventory procedure

Cost of goods available for sale:

Beginning inventory 10,000 units @ Tk.2.00 = Tk.20,000
February 1 5,000 units @ Tk.3.00 = Tk.15,000
April 2 8,000 units @ Tk.4.00 = Tk.32,000
June 8 4,000 units @ Tk.5.00 = Tk.20,000
27,000 units = Tk 87,000

Inventory on hand = 27,000 units - 22,000 units

= 5,000 units

26
(a) FIFO method:

Value of ending inventory:

June 8 4,000 units @ Tk.5.00 = Tk.20,000
April 2 1,000 units @ Tk.4.00 = Tk.4,000
Tk.24,000

Cost of goods sold = Tk.87,000 - Tk.24,000

= Tk.63,000

(b) LIFO method:

Value of ending inventory:

Beginning inventory 5,000 units @ Tk.2.00 = Tk.10,000

Cost of goods sold = Tk.87,000 - Tk.10,000

= Tk.77,000

(c) Weighted average method:

Tk.87,000
Average cost per unit =
27,000 units
= Tk.3.22

Value of ending inventory = 5,000 units X Tk.3.22

= Tk.16,100

Cost of goods sold = Tk.87,000 - Tk.16,100

= Tk.70,900

P-11. [Periodic Method] Lee Company, a wholesaler, made the following

purchases of Material X during 20A.

Date Units Cost per unit Total amount

(Tk.) (Tk.)
January 7 8,000 12.00 96,000
March 30 8,800 12.40 109,120
May 10 12,000 12.00 144,000
July 5 16,000 12.60 201,600
September 2 6,400 12.80 81,920
December 14 7,200 12.68 91,296
Total 58,400 723,936

27
On December 31, 20A; inventory was 15,200 units and on January 1, 20A; 4,000
units at Tk.11.92 each were on hand. The sales price during the year was stable at
Tk.16.

Required:
(a) Prepare a schedule of inventory on December 31, 20A; assuming a periodic
inventory system and weighted average costing method.
(b) Prepare a statement showing material X‟s sales, cost of goods sold and gross
profit for December 31, 20A; assuming the FIFO costing method.

Solution:

(a)
Lee Company
Schedule of inventory
Assuming periodic inventory system
As on December 31, 20A

Inventory on January 1, 20A 4,000 units @ Tk.11.92 Tk.47,680

Purchase 58,400 units @ Tk.12.40* Tk.723,936
Weighted average 62,400 units @ Tk.12.37 Tk.771,616

Inventory at December 31, 20A 15,200 units @ Tk.12.37 Tk.188,024

* Tk.723,936 ÷ 62,400 units = Tk.12.40

(b)

Sales (4,000 + 58,400 – 15,200) units X Tk.16 Tk.755,200

Less: Cost of goods sold:
Inventory on January 1, 20A Tk.47,680
Add: Purchases Tk.723,936
Tk.771,616
Less: Inventory on December 31, 20A (w-1) Tk.193,376
Tk.578,240
Gross profit Tk.176,960

Working:

1. Inventory on December 31, 20A under FIFO costing:

December 14 7,200 units @ Tk.12.68 = Tk.91,296

September 2 6,400 units @ Tk.12.80 = Tk.81,920
July 5 1,600 units @ Tk.12.60 = Tk.20,160
Tk.193,376

28
P-12. [Conventional Retail Method] The records of Daoa Naoa (an online shop)
report the following data for the month of April:

Particulars Tk.
Beginning inventory (at cost) 30,000
Beginning inventory (at sales price) 46,500
Purchases (at cost) 55,000
Purchases (at sales price) 88,000
Purchase returns (at cost) 2,000
Purchase returns (at sales price) 3,000
Freight on purchases 2,400
Sales 95,000
Sales returns 2,000
Marks-up 10,000
Marks-up cancellation 1,500
Marks-down 9,300
Marks-down cancellation 2,800

Required:
Compute the ending inventory by using conventional retail inventory method.

Solution:
Daoa Naoa
Computation of ending inventory
By using conventional retail inventory method

Cost Retail
Beginning inventory Tk.30,000 Tk.46,500
Purchases 55,000 88,000
Purchase returns (2,000) (3,000)
Freight on purchases 2,400 ______-
85,400 131,500
Add: Net marks-up:
Marks-up Tk.10,000
Marks-up cancellation (1,500)
________ 8,500
Total Tk.85,400 Tk.140,000

Less: Net marks-down:

Marks-down 9,300
Marks-down cancellation (2,800)
6,500
Goods available at sales price 133,500
Less: Net sales:
Sales Tk.95,000
Sales returns (2,000)

29
 93,000
Ending inventory at retail Tk.40,500

Total cos t price

Cost to retail ratio =
Total retail price
Tk.85,400
=
Tk.140,000
= 0.61 or 61%

Ending inventory at cost = Tk.40,500 X 61%

= Tk.24,705

P-13. [Conventional Retail Method] Following information are related to Agro

Bazar. Assuming that Agro Bazar uses the conventional retail inventory method,
compute the cost of its inventory on 31.12.2019.
Cost Retail
Inventory on 01.01.2019 Tk.40,000 Tk.70,000
Purchases 60,000 90,000
Purchase returns 10,000 15,000
Purchase discounts 5,000 10,000
Freight-in 15,000 25,000
Marks-down - 25,000
Marks-down cancellation - 5,000
Gross sales 52,000
Sales returns 12,000
Marks-up 27,000
Marks-up cancellation 7,000
Loss from breakage (normal) 10,000

Solution:
Agro Bazar
Computation of the cost of ending inventory
Under conventional retail inventory method
On 31.12.2019

Cost Retail
Tk. Tk. Tk.
Inventory on 01.01.2019 40,000 70,000
Add: Purchases 60,000 90,000
Less: Purchase returns (10,000) (15,000)
Less: Purchase discounts (5,000) (10,000)
Add: Freight in 15,000 25,000
Add: Net marks-up:
Marks-up 27,000
Marks-up cancellation ______ (7,000) 20,000

30
Total 100,000 180,000
Less: Net marks-down:
Marks-down 25,000
Marks-down cancellation (5,000) 20,000
Goods available for sale at selling price 160,000
Less: Net sales at selling price:
Gross sales 52,000
Less: Sales returns (12,000) 40,000
Less: Loss from breakage (normal) 10,000
Inventory at retail on 31.12.2019 110,000

Total cos t price

Cost to retail ratio =
Total retail price
Tk.100,000
=
Tk.180,000
= 0.56 or 56%

Inventory at cost on 31.12.2019 = Tk.110,000 X 56%

= Tk.61,600

31
 QUESTION PATTERN

Marks allocation 100 marks

Number of questions 8 questions

1 – 6 questions (10 marks per each)

Marks per question
7 – 8 question (20 marks per each)

Number of sub-questions 1 - 3 questions

Marks per sub-question Can be varied in between questions

Type of questions Short and narrative answers

Knowledge test level Theory and practical

32
 MOCK EXAMINATION QUESTION

SUBJECT: FUNDAMENTALS OF FINANCIAL ACCOUNTING

Time Allocated: Three Hours Total Marks: 100

Instructions to Candidates

You are required to answer ALL questions

Answers should be properly structured, relevant and computations need to be
shown wherever necessary.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).
ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.
Start answering each question from a fresh sheet. Your answers should be
clearly numbered with the sub-question number then ruled off, so that the
markers know which sub-question you are answering.
No. of questions No. of sub-questions Marks allocation
Question 1 - 6 = 10 marks each
10 Maximum 03
Question 7 - 8 = 20 marks each

TURN OVER

Page 1 of 7

33
 You are advised to spend 18 minutes on Question 1 – 6 (10 marks per each) and
36 minutes on Question 7 – 8 (20 marks per each).

Question 1
(a) “Book keeping and Accounting are same.” Do you agree? Explain.
(b) There are two methods for reporting uncollectibles, direct write-off method and
allowance method. Which one of these you would use in your organization?
Explain.
(c) As per IAS-7 Para 10, Cash Flows must be analysed between operating,
investing and financial activities. Being a professional accountant how you will
explain operating, investing and financing activities?
[Marks: (3 + 3 + 4) = 10]
Question 2
(a) “Depreciation is a process of cost allocation, not valuation”- Explain the
statement.
(b) Discuss the term relevance and reliability as they relate to financial accounting
information.
(c) Evaluate the following situations referring to appropriate accounting principle,
concept or assumption:
(i) Crazy Company owns land that cost Tk.5,000,000. If a „quick sale‟ of the land
was necessary to generate cash, the company feels it would receive only
Tk.4,200,000. The company continues to report the asset on the balance sheet at
Tk.5,000,000.
(ii) Max Corporation performed a job on account for its client and billed them
Tk.115,000 in May 2018. Max collected full in settlement of the bill in June 2018
and reported the collection as revenue for June.
(iii) Susan Automobiles limited took a loan of Tk.20,000 @ 15% and in their
quarterly income statement they have shown interest expenses as Tk.3,000.
(iv) M & W initially recorded purchase of assets at cost and adjusted the value when
the market value changes.
[Marks: (3 + 3 + 4) = 10]
Question 3
(a) The following labor data have been extracted from a database of labor
productivity:
Sunday 260 units 8 hours
Monday 270 units 8 hours
Tuesday 210 units 8 hours
Wednesday 300 units 8 hours
Thursday 240 units 8 hours
Required:
Determine the effective hourly rate and labor cost per unit assuming a 100 percent
bonus plan with a base wage of Tk.40 per hour and a standard production rate of 30
units per hour.
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34
(b) Presented below are selected transactions related to Albart Corporation.
January 15: Sold Albart Corporation‟s credit card for Tk.50,000.
February 15: Received collections of Tk.30,000 on Albart Corporation credit-card
sales and added finance charges of 2% to the remaining balances.
March 10: Sold American Express credit card totaling Tk.10,000. A 5% service fee
charged by American Express.
March 20: Received payment in full from American Express.
April 23: Sold accounts receivable of Tk.20,000 to Neon Company. A 3% service
charge is applicable of the receivable amount.
May 20: Wrote off Tk.40,000 of accounts receivable. Albart uses the allowance
method to record bad debts.
June 30: Credit sales for the first six months total Tk.1,00,000 and the bad debt
percentage is 3%.
July 25: One of the customers‟ accounts receivable written off in May 20
subsequently collected the amount in full.
Required:
Prepare the journal entries for the above transactions.
[Marks: (5 + 5) = 10]
Question 4
(a) For each of the following examples, indicate the type of risk:
(i) Vendor‟s payments are processed, booked and reconciled in the system by the
same person in the Accounts Department.
(ii) The assurance firm may do insufficient work to defect material errors.
(b) The audited financial statements of Asian Trading Ltd. were approved by the
shareholders at the AGM held on 3rd June 2018. On 7th June 2018, the Managing
Director discovered a patty cash fraud by the cashier. It transpired that the fraud has
been carried out over a period of year. Cashier made out and singed cash Expenses
vouchers which were charged to motor vehicle expenses. No receipts were attached
to the petty cash vouchers. The Managing Director signs all cheques for reimbursing
petty cash float.
The company‟s turnover was Tk.20 crore and profit before tax was Tk.1.50 crore.
The partner-in-charge of the audit decided, at planning stage, that no audit worked
need be carried out on petty cash, as he concluded that petty cash expenditure (on
imprest float) was small, so the risk of material error or fraud was also small.
Instruction:
You are required briefly to state auditor‟s responsibilities for detecting fraud and
error in financial stamens.
[Marks: (5 + 5) = 10]
Question 5
(a) You are provided with the following information for ABC Company for the
month ended on June 30, 2018:
Date Particulars Quantity Unit cost or selling Price
Jan.1 Beginning Inventory 40 Tk.20
Feb.1 Purchases 60 Tk.15
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35
Mar.1 Sales 80 Tk.10
Apr.1 Sales Return 20 Tk.10
May1 Purchases 30 Tk.40
May1 Purchases Return 10 Tk.20
Required:
Calculate the ending inventory and cost of goods sold under the following methods
by considering periodic inventory system.
(i) LIFO;
(ii) FIFO; and
(iii) Average cost.
(b) Linux Inc. plans to acquire an additional machine on January 1, 2018 to meet the
growing demand for its product. Surot Company offers to provide the machine to
Linux using either of the options listed below (each option gives Linux exactly the
same machine and gives Surot Company approximately the same net present value
each equivalent at 10%).
Option 1 – Cash purchase Tk.800,000.
Option 2 – Installment purchase requiring 15 annual payments of Tk.105,179 due
December 31 each year.
The expected economic life of this machine to Linux is 15 years. Salvage value at
that time is estimated to be Tk.50,000. Straight-line depreciation is used. Interest
expense under Option 2 is computed using the effective interest method.
Required:
Based upon current generally accepted accounting principles, state how, if at all, the
book value of the machine and the obligation should appear on the December 31,
2018 balance sheet of Linux Inc., for each option.
[Marks: (5 + 5) = 10]
Question 6
The cash account of United Motors Ltd. disclosed a balance of Tk.17,056 on June
30, 2018. The bank statement as of June 30, showed a balance of Tk.21,209. Upon
comparing the bank statement with the cash records the following facts were
developed:
(i) United Motor‟s account has been charged for a customer‟s uncollectible cheque
amounting to Tk.1,143 on June 30.
(ii) A customer‟s cheque for Tk.725 had been entered as Tk.625 both by the
depositor and the bank but was later corrected by the bank.
(iii) A two month 9% Tk.3,000 customer‟s note dated April 28 discounted on June 5
had been posted on June 29 and the bank had charged United Motor for Tk.3,050
which included a protest fee of Tk.5.
(iv) Cheque No. 0151 for Tk.1,242 had been entered in the cash book as Tk.1,224
and cheque No. 0159 for Tk.629 had been entered as Tk.926. The company uses the
voucher system.
(v) There were bank service charges for June Tk.41 not yet recorded on the books.
(vi) A bank memo statement stated that note receivable for Tk.2,500 and interest of
Tk.75 had been collected on June 28 and the bank had made a charge of Tk.25. (No
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36
entry had been made on the books when sent to the bank for collection).
(vii) Cheques outstanding on June 30 were Tk.12,308.
(viii) Receipts of June 30 for Tk.6,850 were deposited July 02.
Required:
Prepare a bank reconciliation statement using where both bank and book balance is
brought to corrected cash balance.
[Marks: 10]
Question 7
Multi Ltd commenced trading three years ago, on 1 January 2016. Its draft balance
sheet at 31 December 2018 and its final balance sheets for the two previous years are
as follows:

2018 2017 2016

CUm CUm CUm
Non-current assets
Property, plant and equipment 231 230 180
Other Assets 169 120 120
400 350 300
Current assets 800 800 800
Total Assets 1200 1200 1200
Capital 100 100 100
Reserves 450 400 350
550 500 450
Non-current liabilities 200 200 200
Current liabilities 450 450 450
Total Liabilities 1200 1150 1100

Additional information is available as follows:

(i) The profit for each of the three years was CU 50m.
(ii) The movements on property, plant and equipment were as follows:
2018 2017 2016
CUm CUm CUm
Brought forward 230 180 0
Direct cost of additions 80 90 180
Interest capitalized 10 10 20
320 280 200
Depreciation (89) (50) (20)
Carried forward 231 230 180
(iii) Property, plant and equipment is depreciated at the rate of 10% of cost per
annum.
The directors now believe that more relevant information would be provided if
interest was not capitalized, so the decision has been made to change the accounting
policy and to recognize all interest as an expense in the year in which it is incurred.
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37
Required:
Prepare the revised balance sheets at 31 December 2018 and 2017, together with
extracts from the statement of changes in equity for each of the two years then
ended.
[Marks: 20]
Question 8
Income statement for the year ended December 31, 2018 and Comparative
Statement of Financial Position as on December 31, 2018 of Hamid Corporation are
given below:
Comparative Statement of Financial Position
As at December 31, 2018
Liabilities & Owners’ Equity Taka Assets Taka
Current Liabilities: Current Asset:
Bank Overdraft 30,000 Cash at Bank 30,000
Sundry Creditors: Interest expense 20,000 Accounts Receivables 70,000
Credit purchase 80,000 Stock-in-trade 140,000
Bill Receivables 10,000
Total Current Liabilities: 130,000 Total Current Asset: 250,000
Long Term Debt -
Total Liabilities: 130,000 Long-term Asset:
Common Stock (Tk.10 each) 200,000 Machinery & 80,000
Profit & Loss Account 60,000 Equipment 150,000
General Reserve 90,000 Building 230,000
Net Long-term Asset:
Total Liabilities & Owners’ 480,000 Total Assets 480,000
Equity

Income Statement
For the year ended December 31, 2018
Particulars Taka Particulars Taka
Cost of Sales: Sales 850,000
Opening Stock 90,500
Add: Purchases 559,500
650,000
Less: Closing Stock 140,000
510,000
Gross Profit c/d 340,000
850,000 850,000
Sales expenses 30,000 Gross Profit b/d 340,000
Office expenses 150,000 Profit on sales of
Financial expenses 15,000 investments 6,000
Loss on sales of fixed assets 4,000 Interest on investments 3,000
Net Profit 150,000
349,000 349,000
TURN OVER
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From the above financial statements calculate the following ratios and give your
comments:
(a) Gross profit margin
(b) Gross profit mark-up
(c) Net profit margin
(d) Working capital turnover ratio
(e) Return on investment ratio.
[Marks: (5 X 4) = 20]

END OF QUESTION PAPER

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