Unit 2 AOS 3 Flashcards
What is a non current asset
= 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
What is a current asset
= 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
What is a non current liability
= 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
What is a current liability
= 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
What is historical cost
= the cost of the asset when purchased
What is fair value
= price received when selling an asset if it was acquired by the business
What qualitative characteristic does fair value uphold
- 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
What is depreciation
= process of allocating cost of a non-current assets over its useful life
What is finite life
= limited period of time 4 which a non-current asset will exist
What is a depreciable asset
= non-current asset that has a finite life + thus must be depreciated over that life
What is depreciable period
= part of the future economic benefit of a non-current asset that has been consumed in the current reporting period
What is straight line depreciation
-> assumes the non-current asset contributes evenly to the generation of revenue over its useful life
What is the straight line depreciation formula
Depreciation expenses ($ per annum) = (historical cost - residual value) / life
What is residual value
= estimated value of the non-current asset at the end of its useful life
What is useful life (life)
= 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
What is the carrying value
= the economic benefit of a non current asset that is yet to be concerned / allocated as an expense + the residual value
How does depreciation impact the accounting equation
A: less NCA
L: N/E
OE: inc expense -> overall less net profit
The to calculate carrying value
CV = historical cost - accumulated depreciation
What is reducing balance depreciation formula
Depreciation expense = depreciation rate x carrying value
How does a bus determine which depreciation method to use
-> need 2 determine assets revenue generating pattern (evenly or unevenly)
What is the difference in the revenue generating pattern between straight line and reducing balance
- 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
What qualitative characteristic prevents a business from changing methods
= 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
Why does a business own non current assets
= 2 assist in process of generating revenue through day to day trading activities
What is asset turnover
= an efficiency indicator that assesses how productively a bus has used its assets to earn sales income
What is the asset turnover formula
ATO = net sales / average total assets
What is the average total assets formula
AvTA = (total assets @ start + end) / 2
What does an increasing asset turnover indicate
-> improvement in the efficient use of the bus assets 2 generate sales revenue
What does a decreasing asset turnover indicate
-> deterioration in efficiency in use of bus assets to generate sales revenue
What causes an improvement in ATO
- 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
What causes a deterioration in ATO
- increase value of assets quicker than sales
- decrease in sales quicker than decrease in value of assets
What is return on assets
= profitability indicator that assesses how effectively a bus has used its assets to earn a profit
What is the return on assets formula
ROA = net profit / AvTA x 100
What does an increasing return on assets indicate
-> improvement in the efficient use of bus assets 2 earn a profit
What does a decreasing return on assets indicate
-> deterioration in the efficient use of bus assets to earn a profit
