tutorial 3

Question 1

What is depreciation?

Answer 1

The systematic allocation of the cost of a tangible (or intangible) asset over its useful life.

Question 2

When do companies account for depreciation?

Answer 2

When they buy non-current assets that are not used up in the current year, accounting for the expected wearing out for the current year.

Question 3

How does depreciation relate to the accrual basis of accounting?

Answer 3

The amount charged is not the total amount paid in the year, but the portion that relates to the current year.

Question 4

What is included in the cost of an asset for depreciation?

Answer 4

All costs incurred to bring the asset to its required location and make it ready for use, like delivery, installation, legal fees, and improvements.

Question 5

What is the useful life of an asset?

Answer 5

The economic life of the asset, used to calculate depreciation, which may be shorter than its physical life.

Question 6

What is residual value (salvage/disposal value)?

Answer 6

The likely amount to be received on the disposal of the asset at the end of its useful life.

Question 7

How is straight-line depreciation calculated?

Answer 7

(Cost of Asset − Residual Value) ÷ Useful Life of Asset

Question 8

How is diminishing value/accelerated depreciation calculated?

Answer 8

Fixed Annual Depreciation Rate × (Net Book Value − Residual Value)

Question 9

What is accumulated depreciation?

Answer 9

The total depreciation charged to the statement of profit or loss in relation to an asset over time.

Question 10

What is a contra asset?

Answer 10

An asset account, like accumulated depreciation, that reduces the value of non-current assets on the balance sheet.

Question 11

What does the balance sheet document?

Answer 11

What the entity owns (assets), external claims (liabilities), and internal claims (equity) on the entity’s assets.

Question 12

What are the two formats of the balance sheet?

Answer 12

T-format (Assets on LHS, Liabilities + Equity on RHS) and Narrative format (Assets, Liabilities, and Equity listed down the page).

Question 13

What is the statement of changes in equity?

Answer 13

A statement that shows the movements in an entity’s equity during the financial period.

Question 14

What are the two main categories in the statement of changes in equity?

Answer 14

Contributed Capital and Retained Earnings.

Question 15

What is the format for retained earnings in the statement of changes in equity?

Answer 15

Retained Earnings (open) + Profit for the period − Drawings/Dividends = Retained Earnings (end).

Question 16

The difference between cash and accrual accounting

Answer 16

Cash accounting records transactions only when cash is exchanged, while accrual accounting records revenues and expenses when they are incurred, regardless of cash flow.

Question 17

How is Profit a function of Accrual Accounting?

Answer 17

In accrual accounting, profit is calculated by matching revenues earned with the expenses incurred to earn those revenues, providing a clearer picture of a company’s financial performance over a period.

Question 18

What does Accrual Accounting mean?

Answer 18

Accrual accounting refers to the method where transactions are recorded when they occur, rather than when payment is received or made, providing a more accurate financial view.