Unit 2 AOS 3

Question 1

What is a non current asset

Answer 1

= present economic resource controlled by the entity as a result of past events that is reasonably not expected 2 be sold, consumed or converted to cash within the 12 months after the recording period

Question 2

What is a current asset

Answer 2

= present economic resource owned by the entity as a result of past events that is reasonably expected to be sold, consumed or converted to cash within 12 months after the end of the reporting period

Question 3

What is a non current liability

Answer 3

= present obligation of the business as a result of past events owed to an entity expected to be settled with the transfer of an economic resource within the next 12 months after the end of the reporting period

Question 4

What is a current liability

Answer 4

= present obligation of the business as a result of past events owed to an entity expected to be settled with the transfer of an economic resource within the next 12 months after the end of the reporting period

Question 5

What is historical cost

Answer 5

= the cost of the asset when purchased

Question 6

What is fair value

Answer 6

= price received when selling an asset if it was acquired by the business

Question 7

What qualitative characteristic does fair value uphold

Answer 7

• will be an estimate + x supported by a source doc as it’s x purchased
  -> faithful rep + relevance = providing fair value is based on extensive market research 2 determine the market value of the asset t/f uphold those 2 Q.C’s

Question 8

What is depreciation

Answer 8

= process of allocating cost of a non-current assets over its useful life

Question 9

What is finite life

Answer 9

= limited period of time 4 which a non-current asset will exist

Question 10

What is a depreciable asset

Answer 10

= non-current asset that has a finite life + thus must be depreciated over that life

Question 11

What is depreciable period

Answer 11

= part of the future economic benefit of a non-current asset that has been consumed in the current reporting period

Question 12

What is straight line depreciation

Answer 12

-> assumes the non-current asset contributes evenly to the generation of revenue over its useful life

Question 13

What is the straight line depreciation formula

Answer 13

Depreciation expenses ($ per annum) = (historical cost - residual value) / life

Question 14

What is residual value

Answer 14

= estimated value of the non-current asset at the end of its useful life

Question 15

What is useful life (life)

Answer 15

= estimated period of time 4 which the non-current asset will be used by the current entity to earn / generate revenue, usually measured in years

Question 16

What is the carrying value

Answer 16

= the economic benefit of a non current asset that is yet to be concerned / allocated as an expense + the residual value

Question 17

How does depreciation impact the accounting equation

Answer 17

A: less NCA
L: N/E
OE: inc expense -> overall less net profit

Question 18

The to calculate carrying value

Answer 18

CV = historical cost - accumulated depreciation

Question 19

What is reducing balance depreciation formula

Answer 19

Depreciation expense = depreciation rate x carrying value

Question 20

How does a bus determine which depreciation method to use

Answer 20

-> need 2 determine assets revenue generating pattern (evenly or unevenly)

Question 21

What is the difference in the revenue generating pattern between straight line and reducing balance

Answer 21

• SL -> contribute 2 generation of revenue evenly
• RB -> contribute 2 generation of revenue unevenly b/c inc moving parts t/f more chance it will wear out t/f become less efficient over time

Question 22

What qualitative characteristic prevents a business from changing methods

Answer 22

= compatibility -> financial info should be able to be compared with similar info re. other entities + with similar info re same entity of another period / data

• usually remain with method until E.O.L h/r can change when upgrading

Question 23

Why does a business own non current assets

Answer 23

= 2 assist in process of generating revenue through day to day trading activities

Question 24

What is asset turnover

Answer 24

= an efficiency indicator that assesses how productively a bus has used its assets to earn sales income

Question 25

What is the asset turnover formula

Answer 25

ATO = net sales / average total assets

Question 26

What is the average total assets formula

Answer 26

AvTA = (total assets @ start + end) / 2

Question 27

What does an increasing asset turnover indicate

Answer 27

-> improvement in the efficient use of the bus assets 2 generate sales revenue

Question 28

What does a decreasing asset turnover indicate

Answer 28

-> deterioration in efficiency in use of bus assets to generate sales revenue

Question 29

What causes an improvement in ATO

Answer 29

• effective advertising
• selling idle assets
• increase mark up (if 2 low)
• implement strategies 2 dec sales returns
• review appropriateness of inventory i.e sell with complimentary goods

Question 30

What causes a deterioration in ATO

Answer 30

• increase value of assets quicker than sales
• decrease in sales quicker than decrease in value of assets

Question 31

What is return on assets

Answer 31

= profitability indicator that assesses how effectively a bus has used its assets to earn a profit

Question 32

What is the return on assets formula

Answer 32

ROA = net profit / AvTA x 100

Question 33

What does an increasing return on assets indicate

Answer 33

-> improvement in the efficient use of bus assets 2 earn a profit

Question 34

What does a decreasing return on assets indicate

Answer 34

-> deterioration in the efficient use of bus assets to earn a profit