Lecture 6 Flashcards
What is the definition of a provision?
A liability of uncertain timing or amount
In the future, might have expenses so set aside money/note it down just in case
- doubtful debts
What are some examples of provisions?
Losses on contracts
Obsolescence of stock
Costs related to closure of a division of the company
How do you calculate provision?
Sales of manufactured goods x % of provision of sales (will probs say in question)
What effect does provision have on the accounting equation?
When provision established:
Liabilities increase, oi decrease (expense)
As repairs under warranty are carried out (or whatever):
Assets decrease (cash), liabilities decrease
What is a non-current liability?
Any liability that does not meet the criteria of a current liability
Also described as long-term liabilities
What are some examples of non-current liabilities?
Loan stock
Debentures
Bonds
Bank borrowing and commercial paper
What are the characteristics of non-current liabilities?
The amount borrowed (the capital sum)
How much is to be repaid
When is it to be repaid
What interest payments must be made
Whether the lender required security for the loan
What is the measurement of non-current liabilities?
General principle - valued at fair value (price that would be paid to transfer a liability in an orderly transaction between market participants)
Tell me about unsecured borrowing
Lender has no first claim to any particular assets of the reporting company
In the event of default by the company, the lender must wait for payment with other unsecured creditors
Tell me about secured borrowing
The lender has first claim to named assets of the reporting company in the case of default
Change in the nature of finance source - tell me about convertible debentures or loan stock
Allows a change in the nature of the source of finance
Issued as a long-term liability
Some time in the future it may be converted into ordinary shares on specified terms
What is the general principle for interest payment on loans?
The amount shown as the expense of interest payable in the income statement (profit/loss account) should be based on the compound rate of interest applying over the entire period of the loan
What is the spreading of interest charges over the period of the loan?
An application of the accruals or matching concept
The issue of shares at the date of incorporation (when the company first comes into existence)
Company issues shares to the owners who become shareholders
Each share has a named value which is called nominal value (par value)
What is accrual?
Matching revenue to expense