Chapter 16 Inventories and Construction Contracts

Examination Style Questions


Question 1
The following details are as at the 31 December 20X5.

You are to assume that profit accrues evenly over the contract.

The income statement for the previous year showed revenue of $225,000 and expenses of $189,000 in relation to contract 4.

The company considers that the outcome of a contract cannot be estimated reliably until a contract is 25% complete. It is, however, probable that the customer will pay for costs incurred so far.

Required:

Calculate the amounts to be included in the income statement for the year ended 31 December 20X5 and the statement of financial position as at that date.

Question 2
(a) The HKICPA's Framework for the Preparation and Presentation of Financial Statements requires financial statements to be prepared on the basis that they comply with certain accounting concepts, underlying assumptions and (qualitative) characteristics. Five of these are:

Matching/accruals

Substance over form
Prudence
Comparability
Materiality


Required:

Briefly explain the meaning of each of the above concepts/assumptions. (5 marks)

(b) For most entities, applying the appropriate concepts/assumptions in accounting for inventories is an important element in preparing their financial statements.

Required:

Illustrate with examples how each of the concepts/assumptions in (a) may be applied to accounting for inventory. (10 marks)

(Total = 15 marks)
(ACCA F7 Financial Reporting June 2008 Q4)


Question 3
(a) Linnet is a large public listed company involved in the construction industry. Revenue on construction contracts is normally recognised by reference to the stage of completion of the contract. However, in certain circumstances, revenue is only recognised to the extent that it does not exceed recoverable contract costs.