The Covid-19 pandemic that started in early 2020 has taken a toll on BB business tremendously....

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The Covid-19 pandemic that started in early 2020 has taken a toll on BB business tremendously. By November 2020, its sales had declined by more than 50 percent, compared to the same period for 2019. The management of BB were worried that BB would not be able to reach its forecasted sales and profits for 2020. This was the main concern of the BB's management as their compensations are tied with the company's profitability. Since early November 2020, BB had been doubling its efforts to increase its sales. After taking the necessary measures to increase its sales, BB, on 15 December 2020, managed to secure a large order from a customer in Jakarta, Indonesia. The customer had specifically informed BB that it would take delivery of the products in early January 2021. This large order was a huge relief to the management of BB. Instruction was made to the account manager to record the order amounting RM350,000 as sale revenue for year 2020. Furthermore, instruction was made to record the products ordered by the customer as inventory for 2020 as shipment would only be made in January 2021. Cost of the products was RM60,000. However, the account manager had unintentionally made an error in recording the inventory, which had resulted the ending inventory overstated by RM60,000. BB's financial year ends on 31 December. During 2020, the inflation had increased due to the Covid-19 pandemic. The increasing prices had affected BB's cost of production. The management of BB were concerned about inventory valuation method during the inflationary period. Since its inception, BB has been using the average-cost method to account for its inventories. The management of BB considered to change to the FIFO method for financial year 2020 as the method is believed could improve BB's profitability during the inflationary period. The accountant, Mrs. Tara had been asked to look into this matter. Following is BB's statement of profit or loss. Bio Beauty Bhd Statement of Profit or Loss For the year ended 31 December 2020 RM ('000) 2,000 Revenues Cost of goods sold: Beginning inventory Purchases 250 450 Goods available for sale 700 200 Less: Ending inventory Cost of goods sold Gross profit Administrative and selling expenses 500 1,500 400 Net income 1,100 You are required to: (a) Discuss how BB's profitability in 2020 and 2021 would be affected as it recorded the order as sales revenue for 2020 and overstated ending inventory for 2020. (b) Prepare the corrected statement of profit or loss for the year ended 31 December 2020. (c) Compare the average-cost method and the FIF0 method and discuss which method would provide higher profit during the inflationary period. (d) Discuss whether it is appropriate for BB to change the inventory valuation method in order to improve its profitability. The Covid-19 pandemic that started in early 2020 has taken a toll on BB business tremendously. By November 2020, its sales had declined by more than 50 percent, compared to the same period for 2019. The management of BB were worried that BB would not be able to reach its forecasted sales and profits for 2020. This was the main concern of the BB's management as their compensations are tied with the company's profitability. Since early November 2020, BB had been doubling its efforts to increase its sales. After taking the necessary measures to increase its sales, BB, on 15 December 2020, managed to secure a large order from a customer in Jakarta, Indonesia. The customer had specifically informed BB that it would take delivery of the products in early January 2021. This large order was a huge relief to the management of BB. Instruction was made to the account manager to record the order amounting RM350,000 as sale revenue for year 2020. Furthermore, instruction was made to record the products ordered by the customer as inventory for 2020 as shipment would only be made in January 2021. Cost of the products was RM60,000. However, the account manager had unintentionally made an error in recording the inventory, which had resulted the ending inventory overstated by RM60,000. BB's financial year ends on 31 December. During 2020, the inflation had increased due to the Covid-19 pandemic. The increasing prices had affected BB's cost of production. The management of BB were concerned about inventory valuation method during the inflationary period. Since its inception, BB has been using the average-cost method to account for its inventories. The management of BB considered to change to the FIFO method for financial year 2020 as the method is believed could improve BB's profitability during the inflationary period. The accountant, Mrs. Tara had been asked to look into this matter. Following is BB's statement of profit or loss. Bio Beauty Bhd Statement of Profit or Loss For the year ended 31 December 2020 RM ('000) 2,000 Revenues Cost of goods sold: Beginning inventory Purchases 250 450 Goods available for sale 700 200 Less: Ending inventory Cost of goods sold Gross profit Administrative and selling expenses 500 1,500 400 Net income 1,100 You are required to: (a) Discuss how BB's profitability in 2020 and 2021 would be affected as it recorded the order as sales revenue for 2020 and overstated ending inventory for 2020. (b) Prepare the corrected statement of profit or loss for the year ended 31 December 2020. (c) Compare the average-cost method and the FIF0 method and discuss which method would provide higher profit during the inflationary period. (d) Discuss whether it is appropriate for BB to change the inventory valuation method in order to improve its profitability.

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