Q11IFRS - Intermediate Accounting (Kieso)

Question

The financial statements of M&S are presented in Appendix E. The company’s complete annual report, including the notes to the financial statements, is available online. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) How does M&S value its inventories? Which inventory costing method does M&S use as a basis for reporting its inventories? (b) How does M&S report its inventories in the statement of financial position? (c) What costs does M&S include in Inventory and Cost of Sales? (d) What was M&S’s inventory turnover in 2015? What is its gross profit percentage? Evaluate M&S’s inventory turnover and its gross profit percentage.

Step-by-Step Solution

Answer

(a) Lower of cost or net realizable value, weighted average cost method. 

(b) Current assets

(c) Inventories £797.80 million, and cost of sales £6,325.90 million.

(d) Inventory turnover equals 7.70 times, and gross profit percentage equals 38.65%.

Step-by-Step Solution Step 1: Valuation of inventories

(a) Company report its’ inventories based on lower of cost or net realizable value. The weighted average cost method is used to report the inventories.

Step 2: Reporting of inventories

(b) Inventories are reported as current assets under the assets section of the statement of financial position. 

Step 3: Inventory and cost of sales

(c) As of 28 March 2015, the Inventories balance equals £797.80 million, and the cost of sales equals £6,325.90 million.

Step 4: Inventory turnover and gross profit percentage

Inventory turnover is calculated as follows: 

$$\begin{gathered} \mathbf{Inventory}\mathbf{ }\mathbf{Turn}\mathbf{ }\mathbf{over}\mathbf{=}\frac{\mathrm{Cost} \mathrm{of} \mathrm{Sales}}{\frac{\mathrm{Beginning} \mathrm{Inventory}+\mathrm{Ending} \mathrm{Inventory}}{2}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{6}\mathbf{,}\mathbf{325}\mathbf{.}\mathbf{90}}{\frac{\mathbf{845}\mathbf{.}\mathbf{50}\mathbf{+}\mathbf{797}\mathbf{.}\mathbf{80}}{2}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{7}\mathbf{.}\mathbf{70} \end{gathered}$$

The gross profit percentage is calculated as follows: 

$$\begin{gathered} \mathbf{Gross}\mathbf{ }\mathbf{Profit}\mathbf{ }\mathbf{Percentage}\mathbf{=}\frac{\mathrm{Gross} \mathrm{Profit}}{\mathrm{Sales}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{3}\mathbf{,}\mathbf{985}\mathbf{.}\mathbf{50}}{\mathbf{10}\mathbf{,}\mathbf{311}\mathbf{.}\mathbf{40}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{38}\mathbf{.}\mathbf{65}\mathbf{\%} \end{gathered}$$