Flashcards in UNIT 5. Chapter 31. Contents of published accounts Deck (17)
Further amendments to the published accounts
• Valuing intangible assets
• Capital expenditure and revenue expenditure
• Depreciation of assets
• Valuation of inventories
Arises when a business is valued at or sold for more than the balance sheet value of its assets due to their good reputation and trading links.
Accounting problems regarding goodwill (2)
• It should not appear as an asset of an existing business because it is difficult to value and easy to lose
• It will appear on the balance sheet of a business that has bought another firm and has paid for the goodwill. However, it should be written off as soon as possible to reasons above.
Def. Intellectual property
An intangible asset that has been developed from human ideas and knowledge e.g. patents, copyrights, brands.
Def. Market value
The estimated total value of a company is it were taken over. This is usually greater than the balance sheet value.
Def. Capital expenditure
Any item bought by a business and retained for more than one year, that is the purchase of fixed or non current assets.
Def. Revenue expenditure
Any expenditure on costs other than non current asset expenditure.
Why capital expenditure should not be recorded as an expense and recorded in the profit and loss account? (2)
• The assets would not appear as fixed assets on the balance sheet - lowers the value of the business below its true worth.
• The year's profits will be low as a result of high costs, while profits later years would be higher.
The decline in the estimated value of a non current asset over time.
How does using depreciation helps avoid problems with balance sheets and profit and loss accounts? (2)
• The assets will retain some value on the balance sheet each year until fully depreciated or sold off.
• The profits will be reduced by the amount of that year's depreciation as overheads
Reasons for decline in asset's value? (2)
• Wear and tear through usage
• Technological change, making the asset more out of date
Def. Straight line depreciation
A constant amount of depreciation is subtracted from the value of the asset each year.
Depreciation = (Original cost of asset - expected residual value)/ expected useful life of assets (years)
Def. Net book value
The current balance sheet value of a non current asset
= Original cost - accumulated depreciation
Benefits and limitations of straight line depreciation
• Easy to calculate and understand
• Made with estimates of life expectancy and residual value -> hence can be inaccurate
• Some assets, like cars, depreciate more in the first 2 years than the following years which is not shown.
What is the link between depreciation and cash flows?
• Depreciation is not recorded in the cash flows - it is a non cash expense in the profit and loss account
• The full price of the non current asset is recorded as cash outflow the moment the payment is made.
How to value inventories in the balance sheet?
Inventories are unsold goods that can be in the form of raw materials, work in progress, or finished goods.
Inventories should be recorded as their purchase price (historical cost) or their net realisable value (NRV), whichever is lower.
E.g. A couch has been bought for 60$ and stored for 6 months. It now needs $20 of repair to be sold for $70. It's NRV is now 70 - 20 = $50. The lost $10 should be recorded as soon as noticed.