Unit 2 AOS3 Flashcards
What is a non current asset?
Is a present economic resource controlled by the entity as a result of past events that is not held for resale and is reasonably expected to be used for more than the next 12 months after the end of the reporting period.
What does historical cost mean?
The cost of the asset when it was purchased.
What does fair value mean?
The price received when selling an asset if it was sold at the time it was acquired by the business.
What Qualitative characteristics are upheld by recording the fair value?
Providing fair value is based on extensive research to determine the market value of the asset, this should uphold faithful representation and relevance.
With reference to qualitative characteristics, discuss the use of fair value for valuing assets contributed to a business by the owner. ( 6 marks).
Fair value is the price received when selling an asset if it was sold at the time it was acquired by the business. It is the valuation used when the owner of the business contributes an asset ( e.g. a computer) to the business.
Using fair value ensures that faithful representation is upheld with the amount appearing in the BS for this asset being the most current valuation, representing the real-life economic events it claims to represent, rather than the original purchase price or historical price of the asset.
Furthermore, the financial position represented by the business BS as a result, provides financial information that is useful or relevant for decision-making as it is capable of changing any decisions made such as when to replace the asset, thus upholding relevance.
However, with the absence of SD’s or other evidence of how fair value was determined it is difficult for independent observers ti agree creating a conflict. Despite this, the use of fair value upholds relevance making it an important concept when recording the contribution of an asset by an owner.
How do we manage NCA’S?
Asset register.
What is an asset register?
A document that shows the asset that a business owns.
What does a asset register show and what to include in one ?
- Date of purchase.
- Description of the asset.
- Serial number(s).
- Acquisition cost.
- Estimated useful life.
- Rate of depreciation.
- Usage for relevant assets e.g. km’s travelled.
- Disposal details e.g. when the NCA was sold and for how much.
Why do we depreciate an asset and what does it help in?
- Helps in accurately reflecting the true value of a company’s assets over time.
- Depreciating these assets on Financial statements ensures that the book value of assets allings more closely with their actual market value, providing a more accurate picture of the company’s financial health.
What does finite life mean?
A limited amt of time ( usually expressed in years ) for which a NCA will exist.
What does depreciable asset mean?
A NCA that has a finite life, and thus must be depreciated over that life.
What does depreciation mean?
It is the process of allocating the cost of an NCA over its useful life.
What does depreciation expense mean?
The part of the future economic benefit of a NCA that has been consumed in the current reporting period.
Are the following assets depreciable?
- Van.
- Inventory.
- Equipment.
- Term Deposit.
- Accounts receivable.
- Computer.
- Cash.
- Yes.
- No.
- Yes.
- No.
- No.
- Yes
- No.
Straight line depreciation Formula?
Depreciation expense = (Historical value( excluding GST) - Residual value)/ Life
Do you include GST in the straight line depreciation formula?
No, you do not include GST straight-line depreciation.
What is the purpose of reporting the depreciation in the income statement?
Depreciation is used on an income statement for almost every business. It is listed as an expense, and so should be used whenever an item is calculated for year-end tax purposes or to determine the validity of the item for liquidation purposes.
How to record Depreciation in BS/ Accounting equation.
A: Assets reduce by $x, thus overall reducing OE by $x.
L: NE., overall NE.
OE: Depreciation expense increases by $x, reducing net profit by $x, thus overall reducing OE by $x.
How to record Depreciation in the IS.
- Other expenses section include the depreciation expense and call it “ depreciation of “name of asset”.
