A Mary Smith commenced trading on 1 September 20X9 as a distributor of the Straight Cut

29.7A Mary Smith commenced trading on 1 September 20X9 as a distributor of the Straight Cut

garden lawn mower, a relatively new product which is now becoming increasingly popular.

Upon commencing trading, Mary Smith transferred £7,000 from her personal savings to open a business bank account. Mary Smith’s purchases and sales of the Straight Cut garden lawn mower during the three months ended 30 November 20X9 are as follows:

20X9

Sold September

Bought

12 machines at £384 each

October

4 machines at £560 each November

8 machines at £450 each

20 machines at £680 each Assume all purchases are made in the first half of the month and all sales are in the second half of

16 machines at £489 each

the month. At the end of October 20X9, Mary Smith decided to take one Straight Cut garden lawn mower out of stock for cutting the lawn outside her showroom. It is estimated that this lawn mower will

Chapter 29 l The valuation of stock

be used in Mary Smith’s business for 8 years and have a nil estimated residual value. Mary Smith wishes to use the straight line basis of depreciation.

Additional information: 1 Overhead expenses paid during the three months ended 30 November 20X9 amounted to

£1,520. 2 There were no amounts prepaid on 30 November 20X9, but sales commissions payable of 2 1 / 2 % of the gross profit on sales were accrued due on 30 November 20X9. 3 Upon commencing trading, Mary Smith resigned a business appointment with a salary of £15,000 per annum. 4 Mary Smith is able to obtain interest of 10% per annum on her personal savings. 5 One of the lawn mowers not sold on 30 November 20X9 has been damaged in the showroom

and is to be repaired in December 20X9 at a cost of £50 before being sold for an expected £400. Note: Ignore taxation.

Required:

(a) Prepare, in as much detail as possible, Mary Smith’s trading and profit and loss account for the quarter ended 30 November 20X9 using: (i) the first in first out basis of stock valuation, and (ii) the last in first out basis of stock valuation.

(b) Using the results in (a) (i ) above, prepare a statement comparing Mary Smith’s income for the quarter ended 30 November 20X9 with that for the quarter ended 31 August 20X9. (c) Give one advantage and one disadvantage of each of the bases of stock valuations used in (a) above.

(Association of Accounting Technicians)

29.8 ‘The idea that stock should be included in accounts at the lower of historical cost and net realisable value follows the prudence convention but not the consistency convention.’

Required:

(a) Do you agree with the quotation? (b) Explain, with reasons, whether you think this idea (that stocks should be included in accounts

at the lower of historical cost and net realisable value) is a useful one. Refer to at least two classes of user of financial accounting reports in your answer.

(Association of Chartered Certified Accountants) 29.9A After stocktaking for the year ended 31 May 20X9 had taken place, the closing stock of

Cobden Ltd was aggregated to a figure of £87,612. During the course of the audit which followed, the undernoted facts were discovered:

(a) Some goods stored outside had been included at their normal cost price of £570. They had,

however, deteriorated and would require an estimated £120 to be spent to restore them to their original condition, after which they could be sold for £800.

(b) Some goods had been damaged and were now unsaleable. They could, however, be sold for £110 as spares after repairs estimated at £40 had been carried out. They had originally cost £200.

(c) One stock sheet had been over-added by £126 and another under-added by £72. (d) Cobden Ltd had received goods costing £2,010 during the last week of May 20X9 but, because

the invoices did not arrive until June 20X9, they have not been included in stock. (e)

A stock sheet total of £1,234 had been transferred to the summary sheet as £1,243. (f ) Invoices totalling £638 arrived during the last week of May 20X9 (and were included in purchases and in creditors) but, because of transport delays, the goods did not arrive until late June 20X9 and were not included in closing stock.

(g) Portable generators on hire from another company at a charge of £347 were included, at this figure, in stock.

Part 4 l Adjustments for financial statements

‘ (h) Free samples sent to Cobden Ltd by various suppliers had been included in stock at the cata-

logue price of £63. (i) Goods costing £418 sent to customers on a sale or return basis had been included in stock by Cobden Ltd at their selling price, £602. ( j) Goods sent on a sale or return basis to Cobden Ltd had been included in stock at the amount payable (£267) if retained. No decision to retain had been made.

Required:

Using such of the above information as is relevant, prepare a schedule amending the stock figure as at 31 May 20X9. State your reason for each amendment or for not making an amendment.

(Association of Chartered Certified Accountants)

You can find a range of additional self-test questions, as well as material to help you with your studies, on the website that accompanies this book at www.pearsoned.co.uk/wood

chapter

Bank reconciliation statements