Question

P2-5 You are hired to review the accounting records of Sheridan Inc. (a public corporation) before it closes its reve- nue and expense accounts as at December 31, 2017, the end of its current fiscal year. The following information comes to your attention. 1. During the current year, Sheridan Inc. changed its shipment policy from f.o.b. destination to f.o.b shipping point. This would result in an additional $50,000 of revenue being recorded for fiscal 2017.

Answer 1

1. Changing the shipment policy from f.o.b destination to f.o.b shipping point means the buyer of the goods becomes the owner as soon as the goods are shipped. This means that revenue will be recognized at an earlier period from now onwards, in contrast to the previous years where the revenue was recognized a bit later. A change in accounting policy (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) should be adopted if:

-Required by IFRS

-Represents events or transaction in a more appropriate manner in the financial statement and enhances the reliability and relevance of the information

2. The estimate is valid if the useful life of the manufacturing equipment has been ascertained properly and gives a fair reflection. It is important that the change in policy gives a true and fair view of the company’s operations. It is governed by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

3. In the statement of financial position, the total amount of cash should be shown under the name ‘bank’. The detailed information about the amounts should be shown under schedules and notes.

4. This is wrong as none of the plots have been sold. Revenue should not be recognized when the entity has not transferred promised goods or services to the customer, according to IFRS 15. IFRS 15(Revenue from Contracts with Customers) follows a five step model –

1. Identify the customer contract.

2. Identify separate performance obligations.

3. Determine price.

4. Allocate the price to performance obligations.

5. Recognize revenue when the said obligations are met.

5. According to IAS 2, the cost of inventories should be assigned by using the FIFO or weighted average methods. The firm shouldn’t switch to another method just because competitors are using the method or to prevent a decrease in net income. It should adopt a method that reflects the correct valuation of the inventory.

7.The product recalls should be shown as an allowance for warranty costs rather than as just sales returns. This is governed by IAS 37 – ‘Provisions, Contingent liabilities and Contingent Assets’.