Page 23 - MCS August Day 2 Tasks

Chapter 10

ADVANCED FINANCIAL REPORTING

(F2) PRACTICE TASKS

TASK 1 – ASSET IMPAIRMENT AND INVENTORY VALUATION

Trigger and task
You receive the following email

From: Takeo Ito (Production Director)

To: Financial Manager

Subject: Asset impairment and related issues

In the absence of some of your colleagues on annual leave or away on a corporate team building
exercise, could you provide me with some financial reporting information to aid my
understanding?

As you are aware, we have an extensive range of plant and equipment that supports our
manufacturing activities. Some of this machinery is general in nature, in that it can be easily
adapted to produce a range of components or products.

Other machinery, such as some of the lens grinders and polishers are specialised. For example,
some lens grinding machines can be used to grind any lenses, but others are for the lower quality
lenses only, and cannot be used for the Professional DLSR range.

I am advised by colleagues that that there is a risk that some of the machines may be regarded as
impaired if they are not fully utilised. Further, machines may be regarded as impaired even if they
are in good working order, and that seems slightly odd to me. Please explain the accounting
requirements relating to impairment of assets.

In addition, Montel has a significant proportion of its working capital tied up in inventories and
work in progress of manufactured goods. Some of these items may be held within inventory for
several weeks before they are sold. Could you explain how inventories of finished goods and
work‐in‐progress should be valued in the financial statements?

Takeo

Prepare a response to Takeo’s email. (45 minutes)

KAPLAN PUBLISHING 39