FINANCIAL REPORTING

Financial Reporting

Financial Reporting

Introduction

This reports deals with the case of a manufacturing firm which manufacture iron ore which is further sold to steel processing company that finally sells it to car manufacturers.

It can be observed from the case study that the demand for iron ore varies from month-to-month, depending on the time of year, so the steelmaking company has a flexible arrangement with the supplier of iron ore. The ore company delivers only what the steelmaker needs each month, whilst raising an invoice for what it has actually produced. The ore company holds any surplus ore in stock until it is called for, which is usually the following month. The case study involves few question which are answered as follows:

How should the ore company present the £5m shortfall in delivery of ore in its accounts?

In order to answer this, we first need to go through the entire situation in detail. According o the case study provided, at the end of its financial year, the ore producer is holding £5m of ore in stock, which it expects the steelmaker to call off in January, However, car production in the UK has fallen off recently, so the situation remains ambiguous as to whether the manufacturer would demand ore or not. The fact that they don't have written agreement on the transactions which involve early buying and ordering, it is actually implied and according o the mutual understanding of the two companies.

Considering the case presented over here, the relevant accounting standard in this case would be IAS 2, which deals with inventories. When we talk about IAS 2, it basically deals with the treatment of stocks of the company. For manufacturing firms, like in the case provided here, the stock would be the raw material that is actually used for the production of ore that is later sold to other industrial buyers. This rule basically explains the categories and proper management of stocks of any company. The basic essence of this IAS 2, is that of dealing with the accounting procedures f recording the stocks in different phases, for manufacturing firms in particular, and then determining the cost and its subsequent recognition as an expense.

The basic treatment of stocks has few guidelines and standard which needs to be followed in order for the stock to be recognized and valued correctly. However, there are few exceptions on which this standard does not apply or we can say that they do not come under the domain of stocks defined by this standard. The first ting which is not included in the IAS 2 is the work in progress that arises from the projects which are under construction contracts. This also includes the directly related service contracts which also incorporate the financial instruments. Apart from this, the other type of stock which is not included in IAS 2 is the biological assets which are related to the agricultural activity in nay region o by any business, this also includes the agricultural products as well which are ...