In 2013 Spar company has only one asset, inventory, worth say £20,000000, then i
ID: 2575515 • Letter: I
Question
In 2013 Spar company has only one asset, inventory, worth say £20,000000, then if the equity is £19,000000 and this year’s profit is £1,000000. If the company could first, adopt more generous inventories valuation policy to decrease provisions for obsolete inventoriesi by £200,000. Second revaluate the value of the inventories based on market value not on book value to increase the inventories by 1,000000.
A. How is the balance sheet of the company looks like before and after adopting these polices?. 1.5 marks
B. Do you think by adopting these polices to decrease provisions for obsolete inventories and increase inventories effect the company’s profit? Explain your answer using the calculation when it need it.
Explanation / Answer
Provision for obsolete inventory decreases the profit and the value of inventory unsold. The decrease in provision will increase both, profit and inventory value.
New Balance Sheet for first policy
Assets
Inventory value - 20200000
Liabilities
Equity - 19000000
Profit - 1200000
Revalution of inventories will increase the inventory value by 1000000 and also increase profit by the same amount
New Balance Sheet for second policy
Inventory - 21000000
Liabilities
Equity - 19000000
Profit - 2000000
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