Year-End Cut-Off at a Wholesale Bakery
Bakkerij Van Looy BV closes its books on 31 December. On 27 December a large order of 1,200 festive boxes is dispatched to a supermarket chain, invoiced at €18,000 excluding VAT, with payment terms of 45 days. The goods left the bakery on 27 December under an FCA delivery term; the buyer's carrier signed the consignment note that same day. On 29 December the customer returns 150 boxes because the packaging was damaged in transit; these are received back in the warehouse on 2 January and are still saleable at full price after repacking. The bookkeeper has recorded the full €18,000 as December revenue and has made no entry for the return. The controller also notes that a supplier invoice dated 30 December for €4,300 of flour delivered on 30 December was not received until 8 January and has not been accrued. Materiality threshold set by the auditor is €5,000. Required: analyse the cut-off, the return, and the unrecorded invoice, and state the corrected figures.
1. Should the €18,000 be recognised as December revenue? Motivate with the applicable recognition criteria and the effect of the FCA term.
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Under IFRS 15 the revenue is recognised when control of the goods transfers to the customer. Under an FCA term the seller fulfils its delivery obligation when the goods are handed to the carrier nominated by the buyer; the consignment note signed on 27 December evidences that transfer. The performance obligation is therefore satisfied in December, and the €18,000 belongs to the December period. The 45-day payment term does not affect the timing of recognition; it only creates a trade receivable. So the bookkeeper's timing is correct in principle. The problem is not the cut-off of the sale but the missing adjustment for the return, which is a separate issue addressed below.
2. How should the 150 returned boxes be treated, given they arrive on 2 January but relate to a December sale?
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The return relates to a sale recognised in December and the damage occurred in transit before year-end, so it is an adjusting event after the reporting date under IAS 10. The return must be reflected in the December figures, not in January. The credit note is 150/1,200 × €18,000 = €2,250 excluding VAT. December revenue becomes €18,000 − €2,250 = €15,750. Because the boxes are saleable after repacking, no write-down of inventory is needed; they simply return to stock at cost. Note the €2,250 is below the €5,000 materiality threshold on its own, but the auditor assesses materiality in aggregate with other misstatements, so it should still be corrected.
3. What is the correct treatment of the €4,300 flour invoice, and what are the final adjusted revenue and expense figures?
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The flour was delivered on 30 December, so the expense and the liability both belong to the December period regardless of when the invoice arrived (accrual principle). An accrual of €4,300 must be recorded. Final figures: revenue €15,750; additional cost of goods/expenses €4,300 accrued. Neither the return nor the accrual individually exceeds €5,000, but together they are €6,550, above the threshold, so the auditor will require correction. The lesson: cut-off is not just about when cash moves or invoices arrive, but about when control and the obligation arise.