Wealth and Measurement of Profit Flashcards
What is the wealth or worth of the enterprise?
What an enterprise owns and what it owes.
What are the key points about wealth?
A static measure (a snapshot at a particular time point)
Can be measured using different measurement bases
Measure at the start of a period will not necessarily be equal to wealth at the end of the period.
What is profit measurement?
The measurement of changes in wealth over time.
What is profit?
Profit is the surplus remaining after total costs are deducted from total sales / revenue for a given period.
What is the primary purpose of a business?
To maximise profits for its owner(s) or stakeholders
Does a relationship exist between profit (income) and wealth?
Yes.
What are the four Wealth measurement bases?
Historic Cost
Replacement Cost
Economic Value
Net Realisable Value
What is Historic Cost?
The original cost incurred in the past to acquire an asset.
What is Replacement cost?
The price an entity would pay to replace an existing asset with a similar asset.
What is Economic Value?
The value of expected earnings from continuous use of an asset.
(Discounted at an appropriate rate)
What is Net Realisable Value?
The estimated selling price of an item less any selling costs.
What is the problem with any basis of measurement?
The problem is one of valuing existing wealth or predicting future income streams.
What is the solution to the problem of any basis of measurement?
Combining two or more of the measures to obtain the best measure.
Evaluate Historic Cost as a measurement base?
Historic costs provides the most objective and verifiable value, but may be unrepresentative.
Evaluate Replacement cost as a measurement base?
Can be difficult to ascertain - a like for like item may not be possible to find or even desirable.
Evaluate Economic Value as a measurement base?
Is highly subjective as it relies on estimates of future earnings.
Evaluate Net Realisable Value as a measurement base?
Is obtained easily but the circumstances of the sale will be influential.
How does measurement of wealth impact profit measurement?
Valuation of non-current assets impacts depreciation cost - which forms part of the profit calculation.
Capital gains or losses and how they are recorded and reported affects the profits of a business.
Valuations for current assets, such as inventory, impact on important component of profit measurement.
What is a alternative to using historic cost as a measurement base?
Fair value
What is Fair Value?
Is defined as the price that would be received in an orderly transaction between market participants at the measurement date.
What are the advantages of using Fair value?
Recommended by a large number of international financial reporting standards (IFRSs)
Distinguishable from Market value.
