Question

For this assignment you are to assume that you are a staff accountant at BikeBuild, a manufacturer of high end off-road bicycles. BikeBuild uses a perpetual inventory system and prepares annual financial statements on December 31. The chief financial officer is concerned about having enough cash to pay the expected income tax bill because of BikeBuild's poor cash management. On November 15, excess inventory of bike parts (raw materials) was purchased in anticipation of an expected increase in bicycle production which will begin in January. To decrease the company's tax liability, the chief financial officer tells you to record the purchase of this inventory as part of supplies and expense it in the current year; this would decrease the company's tax liability by increasing expenses. 1. In which account should the purchase of bicycle parts be recorded? 2. How should you respond to this request by the chief financial officer?

Answer 1

1. The purchase of Excess Bike Parts(Raw Material) shall become part of the Closing Stock of BikeBuild and not as supplies for the Current Year. Hence the parts shall be transferred to the (Closing)Stock A/c and not recorded as expenses.

2. The Chief Financial Officer shall be explained that treating the Bike Parts would violate the Matching Concept which says to recognise Expenses of one year only against Revenue of the same year.

Since the bike parts would be used in manufacturing of Bikes only in the next year, hence they shall be treated as expenses only in next year and not in current year.

This is in conformity with GAAP Generally Accepted Accounitng Principles.(IFRS)