Theory Questions Flashcards
How does a loss on a disposal of NCA occur (correct order)
The business under-depreciated the NCA as a result of overestimating either the residual value or useful life and therefore caused the loss on disposal
How does a profit on a disposal of NCA occur (correct order)
The business over-depreciated the NCA as a result of underestimating either the residual value or useful life and therefore caused the profit on disposal
What QC(s) are breached by depreciating a NCA
Verifiability and Faithful representation. There is no source document or evidence to support the depreciation expense, and useful life/residual value are estimates and may contain bias
What QC is achieved by depreciating a NCA
Relevance. If the NCA was not depreciated it would affect decision making and profit, because the asset would be inaccurately represented in the income statement and balance sheet
Define product costs
Costs associated in getting inventory into a position and condition ready for sale where the costs can be allocated on a logical basis
Define period costs
Costs associated in getting inventory into a position and condition ready for sale where the costs cannot be allocated on a logical basis
Product cost use, effect on profit for current period (Not all inventory sold)
If product costing is used and not all inventory is sold, the business will likely record a greater profit than if period costing was used, because the costs will only be allocated when the units are sold
Period cost use, effect on profit for current period (Not all inventory sold)
If period costing is used and not all inventory is sold, the business will likely record a lower profit than if product costing was used, because the costs will be allocated into the C.O.G.S for the period they were incurred, regardless of the number of units sold.
Define Net realisable value (NRV)
NRV is a method of valuing inventory, that involves all inventory to be recorded at its expected selling prices, less any distribution costs.
Reasons for using the NRV instead of the cost
Damaged inventory
Obsolete or out of season
Deliberate choice
Key differences between Straight line depreciation and Reducing balance depreciation (2)
Straight line has a fixed amount that will be depreciated each period for its useful life, whereas reducing balance has a greater depreciation expense at the start of its useful life because depreciation is a percentage of the carrying value which continues to decrease
Straight line usually is used to depreciate assets that are expected to contribute to earning revenue consistently over their useful life (chair or printer), whereas reducing balance is usually used to depreciate assets like vans which become less productive at earning revenue as they become older
What is the purpose of making balance day adjustments refer to QC
Balance day adjustments are made in order to ensure that the figures reported are relevant to decision making regarding the business and it’s profit. This can assist in decision making and ensuring the most accurate and relevant decisions are made.
