Unit 2 test 3 Flashcards
Historical cost
The cost of the asset when purchased
Fair value
The price received when selling an asset if it was sold at the time t was acquired by the business
Depreciation
the process of allocating the cost of a non-current asset over its useful life
Finite life
A limited period of time (usually measured in years) for which a non-current asset will exist
Residual value
the estimated value of the non-current asset at the end of its useful life
Straight line depreciation
Depreciation expense ($ p.a) = (Historical cost - residual value) / life
Depreciation expense
Depreciation rate x carrying value
Carrying value
Historical cost - accumulated depreciation
Why choose straight-line depreciation
The asset is likely to contribute evenly to the generation of revenue over its useful life
Why choose reducing balance depreciation
The asset is more likely to contribute more early in its useful life to the generation of revenue will usually have many moving parts, increasing the chance that it will wear out and breakdown overtime, becoming less efficient at generation revenue
What is profit
Revenues earned minus expenses incurred expressed in dollar terms
Profitability
The ability of a business to generate a profit as expressed in relative terms by comparing profit aginst a base of sales, assets or owner’s equity
ATO definition
An efficiency indicator that assesses how productively a business has used its assets to earn sales revenue
ATO formula
net sales / average total assets
Strategies to improve ATO
Increase net sales:
- Review distribution channels
- Use of more effective advertising
- Review appropriateness of inventory, are their complementary goods that could be sold
- Implement strategies that reduce sales returns
Increase sales reduce average total assets:
- Sell unproductive, idle, obsolete assets
- Sell assets and then lease them back
