Question 3 Flashcards
Give two examples of a liability of uncertain timing or amount, one of which should be provided for, and the other should be disclosed as a contingent liability note
- When a liability is probable or virtually certain then it must be provided in the Accounts. Eg. when it is probable that a company will have to replace goods that have been returned
- When a liability is only a possibility then no provision in the Accounts is required and instead a note is included. Eg. if there was a dispute with a customer and no responsibility has been accepted for replacing the goods and there is a possibility of a claim being made by the customer
IAS 10 Events after the Reporting period distinguishes between adjusting and non-adjusting events. Give an example of an adjusting event and non-adjusting event
- Adjusting events are those events which provide evidence of conditions which existed during the reporting period, financial statement must be adjusted. Eg. sale of inventories after the end of the reporting period for a price lower than cost meaning inventory value should be adjusted accordingly.
- Non-adjusting events are those events which arose due to conditions that occurred after the end of the reporting period so the Accounts are not adjusted but the event is recorded in a note. Eg. purchase of equipment of substantial value after the end of the reporting period
Should the cost or the net realisable value be used to value inventory if the cost per unit was £12 and the net realisable value was £9?
The net realisable value of £9 should be used as inventory is valued at the lower of cost and net realisable value
Using a journal example, show the effect of making a slow moving inventory provision
Debt: cost of sales
Credit: slow moving inventory provision
-being a provision for slow moving inventory
Companies use historical data to estimate provisions such as BooHoo plc’s customer returns provision. What is the disadvantage of using historical data to make provisions
There will be an error in estimation of some magnitude, large or small
Give two examples of why net realisable value could be lower than cost
- Fashion industry when inventory has had to be substantially discounted due to a change in fashion
- Competitor introduces a new product to the market which is sold for less than the cost of the company’s products which are in inventory. To sell its inventory for the company would have to reduce its sales price below cost
OR - a large permanent reduction in selling price
- errors in production or purchasing
Which figures from P&L Account and the SPF would an accountant use to address Going Concern. Specify four figures
- bank overdraft and loans
- slow moving inventory
- bad debts
- falling sales
- increasing overheads
Give four examples of provisions
- depreciation
- bad debt
- slow moving inventory provision
- repairs
- customer returns
- legal costs
- future pension costs
- warranty provision
A company depreciates its equipment over the useful economic life of the equipment at 25% per annum. It decides to change the depreciation charged for this equipment to 20% per annum. Is this a change in an accounting policy or a change in an accounting estimate?
When a company changes its annual depreciation charge so that its reduced from 25% to 20% per annum, this is a change of an accounting estimate of the asset’s economic useful life. The accounting policy is to depreciate the asset over its useful economic life and this is still being done so there is no change to the accounting policy. Changes in accountancy policy are rare. Changes in accounting estimates occur more frequently.
Give one advantage and one disadvantage of revaluing PPE
- Advantage: are realistic market values of non-current assets in the accounts. Can strengthen the SFP which is useful for raising finance as there would be higher valued assets that could be used for security
- Disadvantage: could be a mixture of assets at cost, old valuations and new valuations, bringing a lack of consistency in the accounts. Higher depreciation charge so lower profits, valuations and market prices can be volatile so there could be frequent changes to the values of non-current assets and revaluations can be costly.
What is the difference between research expenditure and development expenditure and show the different accounting treatments between these
- in the research phase the probability the economic benefits will be generated is too uncertain so the expenditure is charged to the SPF
- the development stage is at a more advanced stage and it may be possible to identify an intangible asset which should be recognised in the SPF
JOURNAL ENTRIES
- debit SPL
- credit cash and bank
- > being recording of research expenditure
- debit SPF
- credit cash and bank
- > being recording of development expenditure
IAS 38 Intangible Assets. Give four examples of Intangible assets
- goodwill
- trademarks
- brands
- copyrights
- development costs
- computer software
- customer lists
When does purchased goodwill arise and can it be recognised in the SPF?
- purchased goodwill is an intangible asset that will only arise when one company acquired another and the purchase price paid exceeds the net asset of the company being purchased
- it can be recognised in SFP on group account of asset do not amortise
- impairment review take place
The cash flow statement requires cash flows to be classified into different activities. What are these activities
The statement of cash flow activities must be shown on the cash flow are:
- operating activities
- investing activities
- financing activities
Which cash flow activities would the proceeds from the issue of share capital be included in and would these proceeds from an issue of shares be a positive or negative cash flow
- the proceeds from an issue of share capital are a positive cash flow and would be included under Financing Activities as the shareholders have put monies into the company to finance it
