Question

The following information relates to ABC Ltd.
Revenue for 2012 amounted to $564 000 (2011- $315 000)
Purchases of inventory for the two years were as follows:
2012 - $303 000
2011 - $182 500
Operating expenses were :
2012 $100 000
2011 $78 000
Profit before tax at the end of 2012 was $27 500. No dividends had been
paid in the last few years.

Taking into account the above information, the directors decided to change
the basis for valuing inventories to weighted average cost as it will result in a
more appropriate presentation of events/ transaction in the financial statements
of the company.

A summary of the closing inventories is provided below:

	2009	2010	2011	2012
On the first in, first out method	18 000	19 500	27 000	48 000
On t he weighted average cost method	19 000	22 900	34 800	51 00

Required
Prepare the statement of comprehensive income for ABC Ltd for the year
ended 31 December 2012, applying the new inventory valuation method.

Answer 1

Answer:

As per the new Inventory net profit before tax will be $22700

Both workings are given below:

Income statement under FIFO method
	2012	2011
Sales	564000	315000
Opening Inventory	27000	19500
Purchase of Inventory	303000	182500
closing Inventory	48000	27000
Cost of goods sold	282000	175000
operating expenses	100000	78000
Total variable cost(COGS+Operating Exp.)	382000	253000
Contribution	182000
Fixed cost(assumed contribution-Net profit)(B?F)	154500
Net profit	27500
Income statement under Weighted average method
	2012	2011
Sales	564000	315000
Opening Inventory	34800	22900
Purchase of Inventory	303000	182500
closing Inventory	51000	34800
Cost of goods sold	286800	170600
operating expenses	100000	78000
Total variable cost(COGS+Operating Exp.)	386800	248600
Contribution	177200
Fixed cost(taken from FIFO method)	154500
Net profit	22700