Current Cost Accounting Flashcards
Current Cost Accounting principle
and difference in CA for SoCI and SoFP
If a firm starts with £100 of inventories, sells it for £125, but the replacement cost at that time is £125, then profit should be shown as 0
Statement of Comprehensive Income: value transactions at
replacement cost at transaction date
Statement of Financial Position: value balances at replacement cost at reporting date.
Current cost accounting questions.
Will be given SoFP and asked to create a new SoFP and Income Statement using current cost accounting
Balance Sheet, Income Statement and Holding Gains/Losses
Working first, do working for each item in the notes. Generally just take the replacement cost given and depreciate it so it matches the current item. Typically we will just depreciate by ONE YEAR.
Draw out balance sheet with same headings in the one given, but have a column for historic cost and Current cost
Income Statement
Will be given transactions from the year. Using these, show workings for the different expenses. Showing DEPRECIATION expense is key! Depreciate the AVERAGE COST BETWEEN THE HISTORIC COST AND CURRENT COST. so add together and divide by two, then calculate depreciation expense for IS.
Holding Gains/Losses
Draw up t account type table for each item that’s value was changed by current cost accounting e.g. inventories.
On left, write Brought Forward amount (amount on the given historic cost sofp) and underneath write Holding gain (difference between brought forward value and new Current cost value + depreciation
On the right, average depreciation charge from average of Historic cost and Current Cost (or any charge you made)
Carried forward amount: New value
At the bottom of both sides should be the total. This will be equal on both sides and should = New Current Cost Value + Depreciation expense
Benefits of Current Cost Accounting
3 advantages
2 disadvantages
Provides more info by splitting profit into holding gains and operating profit
Provides a balance sheet on current value, on figures relevant to the date of the balance sheet
Shows if the business can deal with operating capacity
Disadvantages:
Doesnt take into account inflation
Doesnt give an indication of current market value of all assets, only some
If you get asked a different style of question, which asks for Historic cost, Current cost, CCRT CoCoA
Do a balance sheet with 4 columns for each one.
Historic cost you retrieve from the question or notes
Current cost we take the LOWER of REPLACEMENT COST & RECOVERABLE AMOUNT. To find recoverable amount, take the LOWER of Value in use & NRV
CC Real Terms is the same as CC for all columns, adjustment made at the end in Capital maintenance adjustment column. It is the change in RPI for year multiplied by total CC figure
CoCoA is NRV
