Week 9 - balance sheet

Question 1

What purpose does a balance sheet fulfill?

Answer 1

It provides information about the financial position at a point in time.
A - L = E

Question 2

Why do we prepare a balance sheets (5 reasons)?

Answer 2

1. To determine the ability of the business to pay debts
2. To determine if the business can change it’s nature of operations
3. To determine the value of the business
4. To determine the source of funding
5. To determine the efficiency of management

Question 3

What steps are involved in preparing a balance sheet?

Answer 3

1. Definition - does it satisfy the definition of either an A, L, I, E or OE
2. Recognition - When should we recognise the element in the financial accounting system.
3. Measurement - What financial amount should be recorded.
4. Disclosure & Presentation - What info should be disclosed and how should it be presented.

Question 4

When should we recognise an asset and a liability?

Answer 4

When it meets the definition of an asset

If it provides users of financial statements with information that is useful - i.e. relevant and faithfully represented.

Question 5

What standards should assets meet before being recognised for financial accounting purposes?

Answer 5

1. Capable of generating economic benefit
2. Organisation controls the asset as a result of a past event
3. Relevant to readers of financial statements
4. Asset is faithfully represented.

Question 6

How do we measure assets?

Answer 6

It is done by attributing a financial amount to the asset.
Measured by either of the following:
1. Historical cost (original price)
2. Current value (fair value)

Question 7

How to measure accounts receivable?

Answer 7

By allowing for doubtful debt and creating contra asset (that is offset against accounts receivable).
3 ways to measure:
1. Aged debtor analysis (in this course)
2. Percentage of credit sales
3. Classifying debtors into risk categories and assigning probability.

Question 8

How to measure inventory?

Answer 8

At the lower of either:

1. Cost = purchase cost + import/tax cost + transport cost + handling cost + labelling & packaging cost + modification cost.
2. Net realisable values = estimated proceeds of sale minus estimated costs of completing sale.

Question 9

What happens if Net realisable value falls below cost?

Answer 9

Then the inventory must be written down to net realisable value:
Journal = debit : write down expense
credit : Inventory

Question 10

How to measure Plant, Property and equipment (PPE)

Answer 10

Assets are initially measured at cost or fair value (value asset could be exchanged for)

Then the asset must be depreciated using 3 assessments:

1. The depreciable base (cost - residual value)
2. The assets useful life
3. The cost apportionment of the asset.

Question 11

What is contingent Liability?

Answer 11

They are obligations with a low probability of outflow of economic benefit and/or currently not measurable with sufficient reliability.
If significant then information should be disclosed in the notes of the financial statements.

Question 12

What are the limitation of the balance sheet?

Answer 12

Assets are shown using a mixture of measurements (either cost or fair value), not 1 particular standard.
Some assets are excluded like: labour force, valuable customer base, supplier network.