Reference no: EM132789894

Question - A company reports under IFRS.

(a) The group, a well known retailer of food, clothes, and home goods, uses a periodic inventory system (stock levels are updated only periodically) and uses weighted average cost to value stock and to estimate cost of sales.

For the month of January 2019, the records show:

Date Number of Units Cost per unit £ / unit

Balance at 1 January 3,000 9.00

Purchases 6 January 2,000 9.20

Purchases 28 January 1,500 9.50

Sales 10 January 2,000

Sales 15 January 2,000

Sales 30 January 1,500

Calculate (showing your workings) the cost of the inventory at 31 January 2019, and explain why IFRS permits weighted average cost to be used.

(b) An internal audit inspection in February 2019 discovered that the number of units of opening stock at 1 January 2019 had been overstated. Explain the effect of this error on the gross profit for the month of January 2019.

(c) At the 28 March 2020, the Group held inventories in clothes and home goods (furniture, soft furnishings, dining ware etc) of £355.6m. An impairment charge of £157.0m to write down this inventory was recognized at the year end reflecting management's best estimate of the impact of Covid-19 on the Group. Explain the accounting for inventories, and why the Group had to recognize this impairment charge.

(d) In its Income Statement, the Group presented three columns for 2020 and for the prior year. The columns were headed underlying results, adjusting items, and totals (under IFRS). The write down of inventory was included in adjusting items, which also included one-off expenses of restructuring the business, costs of store closures and other impairment charges. Explain whether you think the presentation of adjusting items adopted was helpful for investors.