In 2013 Spar company has only one asset, inventory, worth say £20,000000, then 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

A.

Balance sheet before adopting policies:

After adopting policies:

B.

Decreasing the amount of provision will increase net income of the company, increasing the value of the inventory also increases the net income of the company.

Hence after policy changes:

Inventory value will increase by= 200000+1000000= 1200000. which will increase net income and closes to retained earnings.

Liabilities and stockholders equity Amount Assets Amount Equity          19,000,000 Inventory          20,000,000 Retained earnings            1,000,000 Total          20,000,000 Total          20,000,000

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