General purpose financial statements – further consideration of the balance sheet

Question 1

Current assets

Answer 1

expected to be sold, consumed or otherwise used to create
income within one year or within the current operating cycle of
the business.

Question 2

Non current assets

Answer 2

An asset that is not classified as current will be classified as
non-current.

Question 3

Why differentiate current and noncurrent

assets

Answer 3

• Indication of future cash flows.
• Identify which assets are able to sell.
• Assess some aspects of the risk of the organisation.

Question 4

Assets can be measured at:

Answer 4

• Face value
• Net realisable value
• Present value
• Fair value
• A ‘mixed measurement’ approach

Question 5

Cash example

Answer 5

• Current asset

* Measured at ‘face value’

Question 6

Debtors (Accounts receivable)

Answer 6

• 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.

Question 7

Inventory

Answer 7

• 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.

Question 8

Prepayments

Answer 8

• 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

Question 9

Property, plant and equipment (PPE)

Answer 9

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.

Question 10

Depreciation of PPE

Answer 10

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

Question 11

Intangible assets

Answer 11

• 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

Question 12

Straight line method of depreciation

Answer 12

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

Question 13

Reducing balance method of depreciation

Answer 13

A fixed percentage is applied to the written down value of the asset

Question 14

Units of production method of depreciation

Answer 14

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

Question 15

Current liabilities

Answer 15

Liabilities to be settled within the 12 months or the normal operating cycle whichever period is longer.

Question 16

Non current liabilities

Answer 16

Liabilities not classified as current

Question 17

Why differentiate current and non current liabilities

Answer 17

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.

Question 18

• Liabilities might be measured at:

Answer 18

• Face value

* Expected vale or present value

Question 19

General principle of measuring liabilities

Answer 19

Liabilities due beyond 12 months reported at present
value.
• Otherwise reported at face value

Question 20

Bank overdraft

Answer 20

• A current liability

* Measured at face value

Question 21

Accounts payable

Answer 21

• A current liability

* Measured at face value

Question 22

Provisions

Answer 22

• 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

Question 23

Bonds

Answer 23

• 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

Question 24

Contingent liabilities

Answer 24

• 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

Question 25

Equity

Answer 25

• 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

Question 26

Limitation 1 of reported total assets

Answer 26

Reported ‘total assets’ does not represent the fair value of all the assets, or the cost, or replacement value of them.

Question 27

Limitation 2 of reported total assets

Answer 27

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.

Question 28

Balance sheet

Answer 28

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.

Question 29

Fair value accounting

Answer 29

The practice of measuring assets and liabilities at estimates of their current value.

Question 30

Historical cost is seen as more conservative and more reliable.

Answer 30

True

Question 31

Fair value accounting is seen as more relevant.

Answer 31

True

Question 32

What has fair value been blamed for?

Answer 32

Dubious practices in the period leading up to the Wall Street crash of 1929.

The 2008 financial crisis.

Question 33

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.

Answer 33

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.

Question 34

Shared capital

Answer 34

This is the amount attributable to the amount paid by shareholders, to the company, for their shares.

Question 35

Retained earnings

Answer 35

This is the accumulation of past profits (and losses), less aggregated dividends, and less transfers of retained earnings to reserves.

Question 36

Reserves

Answer 36

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.

Question 37

Which type of organisations tend to use liquidity order while listing assets and liabilities in their balance sheet?

Answer 37

Banks and financial institutions