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ACCA Applied Skills · Financial Reporting · Limitations of financial statements

Zeta Co sells goods to Alpha Co on 28 December. Under the terms Alpha may return the goods unconditionally in January, and Zeta has recorded the full sale in its year ended 31 December. Which statement best describes the impact on the financial statements?

Revenue and receivables are likely overstated. Under IFRS 15 revenue is recognised only when control passes and must allow for expected returns, so recording a full sale just before year end despite an unconditional return right inflates profit and receivables, which is a common form of creative accounting.

  1. ARevenue and receivables may be overstated because control may not have passed and the return right has not been properly accounted forCorrect
  2. BThere is no distortion because the invoice was issued before the year end
  3. COnly the cash flow statement is affected, as profit is unchanged
  4. DCosts of sales are overstated because inventory has left the warehouse

Explanation

IFRS 15 requires revenue to be recognised only when control passes and to reflect expected returns. Recording the full sale despite an unconditional return right overstates revenue, profit and receivables. Issuing an invoice alone does not determine recognition.

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