Acct20080 Ethics And Governance: Case Assessment Answers

Answer:

Introduction 

The company selected for this task is JB Hi-Fi Limited and the relevant annual report selected for this task belongs to FY2018. The objective of the report is to highlight the inventory related policy pursued by JB Hi-Fi and highlight the implications of the same. Also, the various factors that must be considered by the accounting professionals while framing inventory related policy framework would also be outlined.

1.

The crucial information about the inventory disclosure is highlighted in Note 7 in the notes to financial statements section. The relevant screenshot in this regards is stated below (JB Hi-Fi, 2018).

One of the crucial takeaways is with regards to recording the closing inventory which is done on the basis of the lower of cost or the net realisable value. Further, it is noteworthy that net realisable value is essentially dependent on the judgment of the management which potentially can be abused in order to boost profitability or drag it lower based on the underlying vested interests. It would be better if every alternate year, the company can organise an inventory valuation and related audit which would independently highlight the realisable value of the pending inventory (Caanz, 2016). This tends to a sound policy particularly considering the business of the company. The company tends to deal with various video games and electronic items which may suffer damage or may become obsolete. In either of the cases, the net realisable value of the inventory would be lower than the cost of goods. Hence, the given closing inventory tends to provide an accurate description (Deegan, 2014).

However, if alternatively, the inventories were recorded on cost, then the balance sheet would contain a higher estimation of inventory and lower cost of goods sold. This in turn would have inflated the profit for the current reporting period while supressing it for the next. Clearly, this would amount to misrepresentation in the financial statements as the accurate picture would not be presented in that case. Another pivotal aspect which is noteworthy is the fact that the inventory cost assigning is carried on the basis of average costs. As a result, any differences in price of procurement of inventory at different times of the year are averaged out to yield a single value which would serve as the cost of goods sold (Gay & Simnett, 2012).

This policy would have significant impact on the cost of goods sold. For instance, consider a scenario where the inventory cost is rising and FIFO method is used. Under this scenario, the cost of goods sold would be lower than the corresponding costs under weighted average method. However, the ending inventory would be higher under FIFO as compared to weighted average. The net result would be that profits would be higher under FIFO in an inflationary environment with context to inventory (Deegan, 2012).

2.

The key factors that must be considered by the accountant are stated below.

• Accounting Standard – It is imperative that the accounting policy for measuring the cost and ending inventory must be in line with the applicable accounting standard i.e. AASB 102 and hence it is essential that the policy must confer to the applicable rules (AASB, 2004).
• Nature of Business – It is noteworthy that AASB 102 does provide some flexibility to the business in relation to choosing the appropriate costing method from FIFO, LIFO and weighted average and this choice needs to be exhibited considering the various business aspects (AASB, 2016). An essential aspect is the presence of any trend with regards to inventory cost and the underlying variation in the inventory cost. If the inventory cost typically remains stable, then FIFO may be the preferred choice. In case of variation in inventory cost with no particular pattern, the weighted cost method may be suitable so as to ensure that the costs are charged on an average basis thereby reflecting the impact of both high inventory costs as well as low inventory costs (Deegan, 2014).
• Durability of inventory – With regards to valuation to inventory, considering the net realisable value becomes imperative when there is a risk of obsolescence and depreciation of inventory. This is especially the case in technology oriented products. As a result, it is essential that closing inventory must reflect these changes and should not be represented at cost (Gay & Simnett, 2012).

Conclusion

From the above discussion in the context of JB Hi-Fi, the importance of inventory valuation and the impact on profitability and cost in the income statement has been highlighted. As a result, decision regarding inventory accounting needs to be made wisely considering various factors. These factors include the business type, nature of inventory and the applicable rules of AASB 102 which is the accounting standards for inventory.

References

AASB (2004) AASB 102, Retrieved from https://www.legislation.gov.au/Details/F2005B01550 

AASB (2016) AASB 102, Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf 

Caanz, S. (2016), Auditing and Assurance Handbook 2016 Australia, 3^rd ed., Sydney: John Wiley & Sons

Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill

Gay, G. & Simnett, R. (2012) Auditing and Assurance Services in Australia, 5th ed., Sydney: McGraw-Hill Education 

JB Hi Fi (2018) Annual Report 2018, Retrieved from https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf