Adjustments Flashcards
What is inventory
Cost of unsold goods
Gross profit equation
Sales revenue - cost of sales
Revenue equation
Units sold x unit price
Closing inventory equation
Units unsold by end of year x unit cost
Cost of sales equation
Units sold x unit cost
cost of goods available
(Opening inventory + purchase costs) - closing inventory
What is matching concept
Costs should be set against the revenue they generate (Cost of sales and revenue are matched together)
What are the valuation issue of inventory
If goods are damaged or obsolete they may need to be sold at a price below cost
What is prudence concept
Do not overstate assets and understand liabilities
Relationship between inventory and net realisable value
Take the lower of Inventory and NRV
What is net realisable value
Sale value - costs incurred in settling inventory
What happens when goods are indistinguishable
When assets have changed over time businesses must estimate inventory costs
What are the three assumptions about physical flow of inventories
FIFO, LIFO, AVCO
What is FIFO
First in, first out
What is LIFO
Last in, first out
What is AVCO
weighted average, cost of sales comprises of an average cost of all purchases
What is capital expenditure
Amount spent to acquire or improve a non-current, long-term asset such as equipment or buildings
What is revenue expenditure
Amount that is expenses immediately so is matched with the revenues of current accounting period
What is depreciation
The allocation of the cost of a non-current asset over the accounting periods that comprise its useful economic life to the business, reflecting the amount that I used up in these periods.
What is the point of depreciation
To allocate the cost of each year with the years revenue
What are reasons for depreciation
Wear and tear from use, passing of time, obsolescence
What is a depreciation expense
The amount of an asset’s cost which is allocated from the SOFP to the SOPOL to match against the revenue the asset generates
When is straight line depreciation applied
If the business believes asset is used evenly across useful life
What is the straight line depreciation equation
(Historic cost - residual value) / Useful life in years
What is reducing balance depreciation
Gives a decreasing annual amount, applied the asset depreciates faster in earlier years of life
Reducing Balance equation
Rate % x NBV or asset at the start of the year
How to commute depreciation steps
- Which assets
- Historical cost
- Expected useful economic life
- Estimated residual value
- Method
How to decide which assets should the business depreciate
- Those expected to be used in more than one accounting period
- Have a limited useful life
- Are held for use in production/ supply of goods/ rental/ administrative purposes
What is the historical cost
Cost of acquisition
What is the expected useful economic life?
The period an asset is expected to be available for use by the entity
What is estimated residual value at the end of its life
How much the entity would obtain from disposal of the asset after deducting costs of disposal
What is closing inventory on the SOFP
Increase in Asset - DR
What is closing inventory on the SOPOL as a calculation of gross profit
Decreased expense - CR
What is depreciation on the SOFP
Decrease in assets CR
What is depreciation on the SOPOL
Increased expense DR
