lecture 3: balance sheet assets

Question 1

use of valuation of inventory:

Answer 1

(at the lower of cost or NRV)
this shows the principle of conservatism because you don’t want to over -evaluate your asset

Question 2

cost of purchase vs cost of conversion

Answer 2

purchase= net of discounts and rebate
conversion = labour costs

Question 3

valuation rules

Answer 3

• item by item calculated at cost or NRV (lowest one)
• total cost vs total NRV compared, choose lowest valuation

Question 4

pre-paid expenses

Answer 4

asset representing service that is paid in advance -> OWED to the company in the future

Question 5

A/R

Answer 5

amount due from customers
- credit sales
- doubts about recoverability

Question 6

what are write offs and provisions

Answer 6

when there are doubts abour recovery we adjust journal to reflect the concern (prudency concept)

write offs-> AR credit and expense debit
provision -> provision credited and expense debited

Question 7

capitalized

Answer 7

recognized on the BS and costs are spread

Question 8

write off

Answer 8

recognized on IS as full amount

Question 9

interest capitalization

Answer 9

interest has to be capitalized when it is incurred on financing as asset under construction and when conditions are met

Question 10

what is the analysis impact?

Answer 10

In general, the trend of earnings is smoother ad stockholder’s equity is higher depreciation charges will also be higher

Question 11

depriciation long lived assets (meaning)

Answer 11

when using the assets, their value and future earnings potential will decrease. (There are different methods to account for it: straight line, accelerated and production)

Question 12

steps in revaluation of useful life

Answer 12

1. old yearly depreciation
2. NBV in the year of repair or maintenance
3. new annual depriciation (based on the new estimate useful life

Question 13

two ways of subsequent value changes

Answer 13

• revaluation= upward, the surplus of the assets is not a gain for IS
• impaired = downward, occurse only when carrying value (NBV) is smaller then recoverable amount

Question 14

intangeble assets

Answer 14

assets without physical presence and hence have harder calculation of the value. (common practice: R&D, goodwill, others like patents , brandname)

Question 15

R&D (intangible asset practice)

Answer 15

• research= original work -> immediately ecpenses
• development = using research to improve products -> capitalized and then amortized

Question 16

goodwill (intangible asset practice)

Answer 16

there is a goodwill if there is an acquisition
= deifference between “ what company pays” to asquire another company and the “market value” of the company’s assets