QUESTION FOUR - assignment two

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains guidance on the use of accounting policies and accounting estimates. Chipata Supermarkets Limited owns a chain of retail shops. Most of Chipata Supermarkets Limiteds competitors value their inventory using the average cost (AVCO) basis, whereas Chipata Supermarkets Limited uses the first in first out (FIFO) basis. The value of Chipata Supermarkets Limiteds inventory at 31 December 2019 (on the FIFO basis) is K20 million. However, on the AVCO basis it, would be valued at K18 million. By adopting the same method (AVCO) as its competitors, the financial accountant says the company would improve its profit for the year ended 31 December 2019 by K2 million. Chipata Supermarkets Limiteds inventory at 31 December 2018 was reported as K15 million, however on the AVCO basis it would have been reported as K13.4 million. Required: (a) Explain the basis on which the management of an entity must select its accounting policies and distinguish, with an example, between changes in accounting policies and changes in accounting estimates. [5 Marks] (b) Comment on the acceptability of the financial accountants suggestions and quantify how they would affect the financial statements if they were implemented in accordance with IFRS requirements. Ignore taxation. [10 Marks] [TOTAL: 15 Marks]