Exam revision Flashcards
What does the balance sheet show and why is it important?
It shows the financial position of a business at a point in time.
- It shows the business ability to pay debt
- If the business could change its operations.
- Value of the business
- What sources are funding the business
- If the business is running efficently.
Why is measuring assets important?
It shows the future economic benefit of the asset, and is the value displayed on financial statements.
What is the allowance for doubtful debt?
It is a guess by management of the amount in accounts receivable that will not be collected.
It is a contra asset and is offset against the value of the accounts receivable account.
According to accounting standards how should inventory be measured?
Accounting standards (IAS 2: Inventory) requires that inventory be measured at the lower of cost or net realisable value.
What is included in the cost of inventory?
Includes all costs associated with bringing stock to sale condition and location:
- Cost of purchase / taxes and transport/handling to point of sale.
- Cost of conversion (labour for packaging and labelling)
- Modification for sale
What is Net realisable value?
Estimated proceeds of sale, minus any additional alterations/manufacturing/transport of advertising.
What inventory value should be included on the balance sheet?
Lower of cost or net realisable value.
If NRV lower, than inventory needs to be written down:
Debit - inventory write-down expense.
Credit - Inventory
According to accounting standards how should Plant, property and equipment be measured?
Accounting standards (IAS16: PPE) allows different types of PPE to be measured at either cost or fair value.
What is cost value?
It is all costs incurred to acquire the asset, get it to location and ready for use.
What is fair value?
Amount for which an asset could be exchanged (estimated worth)
How is the acquisition of PPE completed without cash? And how is it valued?
It is exchanged for a non-cash asset.
The acquired item is valued at the fair value of the asset you exchanged it for (fair value of what you have sold).
What is depreciation?
A depreciation expense is the allocation of the cost over the accounting period in which the economic benefits are expected to be generated by the asset.
What is the straight-line method of depreciation and how is it calculated?
It allocates an equal amount of depreciation to each year.
(Cost - expected residual value) / useful life
What is the perpetual system of inventory management?
It recognises cost of sale (COGS) each time an inventory item is sold, by keeping a running total of stock increases and decreases.
With the use of bar-codes many organisation use this system.
What is the periodic system of inventory management?
Total cost of sales is determined at the end of an accounting period, by counting periodically and cost assigned to the closing inventory balance.
