week 5 Flashcards
what are non-current assets
long term in nature
expected to contribute income for more than one year
indirect relationship with trading activities
acquired through capital expenditure
divided into intangible, tangible and financial
what are current assets
short term in nature
convertible into cash in less than one year
usually relate directly to trading activities
linked to revenue expenditure
divided into inventories, trade recievables and cash
what is the initial value of non-current assets
cost of acquiring the asset + cost of bringing it to its working condition and location
includes costs like purchase price, costs of site preparation, delivery and installation, professional fees
excludes cost of warranty, maintenance agreement, replacements and spare parts
when do assets need revaluing
due to inflation value of non-current assets needs evaluating
a business needs to revalue all assets of the same type at once
what is depreciation
systematic allocation of the depreciable amount of an asset over its useful economic life
reflects amounts of the economic benefits of the tangible non-current asset that have been consumed during the period
what is annual depreciation
amount of the total cost of a non-current asset used up during the year
how do you calculate depreciable amount
cost of an asset - expected residual value
residual value is the estimated disposal proceeds at the end of an assets useful life
what is useful economic life
determines the expected useful life for calculating depreciation
time for which an asset is expected to generate economic benefits for the firm
needs to be estimated for non-current asset
depend on physical life and technological obsolesence
what data do you need to calculate depreciation
historical cost
length of an assets expected useful economic life
estimated residual value
what is straight line depreciation
assumes the amount of asset used up is constant each year
how do you calculate straight line depreciation
(original cost - estimated residual value) / estimated useful life (years)
what are the advantages of straight line method
most appropriate for assets that are depleted as a result of time
may be suitable where an assets utilisation is the same each year
easy to understand and calculate
what are the disadvantages of straight line depreciation
may not give an accurate measure of the loss in value or reduction in useful life
what is reducing balance depreciation
applies a constant/fixed percentage depreciation rate each period to the assets net book value at the end of the period
how do you calculate reducing balance depreciation
what are the advantages of reducing balance method
most appropriate for assets that deteriorate as a result of usage where this is greater in earlier years
may also be suitable where the utilisation is the same each year
decreasing annual depreciation combined with increasing repair costs give a relatively constant combined annual charge
gives a more realistic approximation of the reduction in resale value
what are the disadvantages of reducing balance method
contains random assumption on rate of declining value
quite complex
how do you calculate the sum of digits depreciation
(N x (N+1)) / 2
which is the denominator
numerator is the year number in reverse
eg if N = 4 years
year 1 is 4/10
how do you bookkeep for depreciation
depreciation reduces the amount the asset is recorded at in the balance sheet by the amount that has been used
amount of depreciation charged in the year is an expense in the income statement
in the balance sheet asset shown at net book value
what happens when you dispose of a non-current asset
before disposal - depreciation based on knowledge of historical costs and estimates of residual value and economic life
at disposal - have actual values for residual value and economic life, calculate if you made a profit or loss
how do you calculate CB of NBV
OB of NBV - disposed NBV
how do you calculate profit/loss on disposal
proceeds - disposed NBV
how do you calculate NBV
cost - accumulated depreciation
how do you calculate partial year depreciation
either on a strict time basis, from date of purchase to end of accounting year
or
in year of disposal, from start of accounting year to date of sale
what are intangible assets
non-monetary assets without physical substance, includes patents and copyrights
own category in statement of financial position
what are the three attributes of intangible assets
identifiability - separable and can be transferred
control - ability to obtain benefits from asset
will create future economic benefits
what are identifiable intangible assets
a specific value can be placed on each individual asset, and can be separately identified and sold
what are unidentifiable intangible assets
intangible assets that cannot be separately sold
what is amortisation of intangible assets
intangible assets with a limited useful life are amortised (depreciated) over their useful lives
the amortisation method should reflect pattern economic benefits are derived, if a pattern cannot be determined use straight line
