financial accounting - statement of financial position Flashcards
INCLUDES WORKING CAPITAL
explain what is meant by depreciation?
accounting estimate of the fall in value of a fixed asset over time
how to calculate straight-line depreciation?
(cost-residential value)/estimated useful life
how to calculate reducing balance depreciation?
net book value x depreciation rate
key point of depreciation?
- reflects the true value of fixed assets making the accounts more realistic
what are current assets (short term- less than a year)
- debtors
- stock
- cash
what are current liabilities?
- overdraft
- creditors
what are non-current assets?
things necessary for the business to function
- machinery
- premises
- vehicles
- fixtures + fittings
what are non-current liabilities?
- long term bank loan
- mortgages
how to calculate net assets?
total assets - total liabilities
what is a statement of financial position? aka balance sheet
a method of recording the value or wealth of a business at a given moment in time
what is contained within a statement of financial position?
- non-current assets
- inventory
- receivables
- payables
- working capital
- non-current liabilities
- net assets
- retained earnings
- total shareholder equity
what is inventory on a SoFP?
inventory forms the materials, unfinished goods, and finished goods
liquidity
what are receivables and trade (DEBTORS)?
money that is owed to the business
counted as a current asset (paid in less than a year)
what are creditors (payables)?
opposite of debtors
who the business owes money to e.g, suppliers
what are net current assets?
current liabilities - current assets
= value of companies assets
how to calculate net assets?
total assets (current+non) - total liabilities (current+non)
what are reserves and retained earnings?
money that has been retained in the business in order to help it grow
what is shareholder equity?
value of funds tied up in the business - shares or retained profits
how can goodwill be used to value assets?
when acquiring a business, the buyer pays more than the assets may be worth
how can bad debts be used to value assets?
important for a business to make allowances for such bad debts, in order to gain a realistic valuation of assets
how can patents be used to value assets?
- more technological = higher value
- quantitative = measurable
= qualitative = uses need to be ?ed
how are SoFPs useful?
- when obtaining a loan from the bank, can see if business has sufficient assets for security
- business can see if it has enough cash to keep afloat (net current assets)
- can calculate ratios
what are the advantages of straight line deprecation?
- amount is lower in first years compared to reducing balance
- lower level = higher valuation of asset = business value is higher
- less deducted, profit is higher
what are the disadvantages of straight line depreciation?
- estimate of residual value, difficult to find
- assumes life of asset is known
- lower level is misleading: inflated
what are the advantages of reducing balance?
- reflects values more realistically
- no estimate of residual value needed
what are the disadvantages of reducing balance?
- higher level = lower value
- lower value = harder to borrow
