General purpose financial statements – further consideration of the balance sheet Flashcards
Current assets
expected to be sold, consumed or otherwise used to create
income within one year or within the current operating cycle of
the business.
Non current assets
An asset that is not classified as current will be classified as
non-current.
Why differentiate current and noncurrent
assets
- Indication of future cash flows.
- Identify which assets are able to sell.
- Assess some aspects of the risk of the organisation.
Assets can be measured at:
- Face value
- Net realisable value
- Present value
- Fair value
- A ‘mixed measurement’ approach
Cash example
- Current asset
* Measured at ‘face value’
Debtors (Accounts receivable)
• Current asset
• At ‘face value’, less an allowance for doubtful debts
• Allowance for doubtful debts is used to recognise that a
certain percentage will not ultimately pay.
Inventory
• Current asset
• Measured at the lower of cost and net realisable
value.
• Net realisable value is the estimated proceeds of
sale less costs to completion and costs to sell.
Prepayments
• Measured at amortised cost
• The expenses paid in advance
• Record at the amount that related to future services
to be provided
• E.g. rent, insurance, various service contracts
Property, plant and equipment (PPE)
Property, plant and equipment (PPE) are tangible
items that:
a. Are are held for use in the production or supply of
goods or services, for rental to others, or for
administrative purposes; and
b. Are expected to be used during more than one
period.
Most items of Property, plant and equipment (PPE) are not expected to have an indefinite life.
Depreciation of PPE
Depreciation is the allocation of the cost of an asset
over the periods in which benefits are expected to be
generated.
• In calculating depreciation we must make judgements
about:
• The depreciable base
• The asset’s useful life
• Appropriate method of cost apportionment:straight-line method, reducing balance method, and units of
production
Intangible assets
• Non-monetary assets without physical substance
• Required to be separately disclosed
• Only externally acquired intangible assets can be
recognised
• Exception, development expenditure as part of R & D
• General prohibition on revaluing most externally
acquired intangible assets
• Examples: brand names, mastheads and publishing titles,
licences and franchises
Straight line method of depreciation
Allow the depreciation cost to be charged evenly throughout the useful life of the asset.
Depreciation expense per annum = (cost-expected residual value)/expected useful life of the asset
Reducing balance method of depreciation
A fixed percentage is applied to the written down value of the asset
Units of production method of depreciation
The calculation of depreciation expense is based on the productive capacity and actual use of the asset
Depreciation expense per anum = (cost-expected residual value)/total estimated units * units used in the period
Current liabilities
Liabilities to be settled within the 12 months or the normal operating cycle whichever period is longer.
Non current liabilities
Liabilities not classified as current
Why differentiate current and non current liabilities
Knowing liabilities to be paid within one year, or in the normal operating cycle of the organisation, is important to lenders, financial analysts, owners, and managers of the organisation.
• Liabilities might be measured at:
- Face value
* Expected vale or present value
General principle of measuring liabilities
Liabilities due beyond 12 months reported at present
value.
• Otherwise reported at face value
Bank overdraft
- A current liability
* Measured at face value
Accounts payable
- A current liability
* Measured at face value
Provisions
• Current or non-current liabilities
• Some uncertainty about the timing or amount of the
future expenditure
• If it is not expected to be settled for more than a year
then discounted to its present value
Bonds
• Larger organisations issue bonds to borrows funds
• Form of loan, a security
• They are an instrument of indebtedness
• Obliged to pay the bondholder interest on a periodic
basis and also repay the principal at the maturity
date.
• Measured at present value
Contingent liabilities
• Obligation is dependent upon a future event or
• the obligation cannot be measured reliably at a given point
in time.
• Does not satisfy the definition or recognition criteria for
being a ‘liability’
• If the contingent liabilities is large
• information is required to be disclosed in the notes
Equity
• Equity is the residual interest in the assets of the
entity after deducting its liabilities
• For a company, equity might be made up of
number of components, for example:
• Share capital
• Retained earnings
• Reserves
Limitation 1 of reported total assets
Reported ‘total assets’ does not represent the fair value of all the assets, or the cost, or replacement value of them.
Limitation 2 of reported total assets
Reported ‘total assets’ does not include many
valuable assets, such as its labour force, key
intellectual capital, valuable customer and supplier networks and so forth.
Balance sheet
Also known as the statement of financial position.
• Provides details of the assets, liabilities and equity of an organisation at a point in time.
• Because it is ‘at a point in time’ its relevance can decrease with the passing of time.
• Based around the accounting equation of A = L + OE
• Often presented in the form A – L = OE
• Prepared at least once a year, but can be prepared more often if required.
Fair value accounting
The practice of measuring assets and liabilities at estimates of their current value.
Historical cost is seen as more conservative and more reliable.
True
Fair value accounting is seen as more relevant.
True
What has fair value been blamed for?
Dubious practices in the period leading up to the Wall Street crash of 1929.
The 2008 financial crisis.
Accounting measures assets using a variety of values, why is this acceptable? Is it also acceptable to use different valuations for social and environmental events? Explain by considering stakeholders of an organization.
Not all assets are measured on the same basis , this might seem odd, but it is the case and this creates what we might refer to as an ‘additivity problem’ (we add up all the assets to calculate a total figure but the values of these assets are not on the same base). Some assets might be measured at face value, whilst others might be measured at net realisable value, present value, or fair value. This is called a ‘mixed measurement’ approach. As there is no regulation for social and environmental events the valuations should be made using the most relevant and reliable methods that are most useful to stakeholders.
Shared capital
This is the amount attributable to the amount paid by shareholders, to the company, for their shares.
Retained earnings
This is the accumulation of past profits (and losses), less aggregated dividends, and less transfers of retained earnings to reserves.
Reserves
Companies can have numerous types of equity reserves. For example, from time to time a company might transfer amounts out of retained earnings and into reserves to cover future expansion plans.
Which type of organisations tend to use liquidity order while listing assets and liabilities in their balance sheet?
Banks and financial institutions
