NMU Toybox (Change in policy)

Your cousin works for Toy Box Limited, a company that manufactures children’s toys. He
has approached you for assistance in preparing the 20x2 annual financial statements for the
company.

Additional information:

1. In order to reflect the latest cost in the accounting records at year end, the directors
decided to change the business’s method of inventory valuation from the weighted
average to the FIFO basis.

You were presented with the following figures relating to the new and old method of
inventory valuation:
20x2 20x1 20x0
R R R
Closing inventory (FIFO) 570 000 380 000 460 000
Closing inventory (Weighted Average) 520 000 370 000 430 000

2. Cost of sales for the year ended 31 December 20x2 has not yet been updated for the new
inventory valuation.

3. Retained earnings at 1 January 20x2 amounted to R654 321.

4. Dividends declared amounted to R25 000 in the 20x1 financial year and R18 000 in the
20x2 financial year.

5. Profit as reported in 20x1 financial statements was R400 800. The profit before tax for
20x2 (prior to any adjustments for change in policy) was R504 000 and the tax expense is
R80 000.

REQUIRED:

a) Prepare the change in accounting policy note to the financial statements of Toy Box
Limited for the year ended 31 December 20x2:

b) Prepare the retained earnings column as a extract of the Statement of changes in

equity of Toy Box Limited for the year ended 31 December 20x2.

• Comparatives are required.

Show all workings.

[R201 June 2010, Q5 adapted]

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