ACCT1101 Lecture Notes - Lecture 5: Income Statement, Accounts Receivable

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29 May 2018
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Lecture5Assets:
Allassetsareexpectedtoreturnsomefutureeconomicbenefitsforabusiness
Thisfutureexpectedeconomicbenefitscanchangeinlightofchargingbusiness
circumstances
Thefinancialstatementsmustreflectsthechangeinfutureexpectedeconomicbenefits
Businessesneedtogivethemostappropriateassetvaluesinthefinancialstatements,so
itsuserscanmakethebestfinancialdecisionsabouttheentity.
AssetMeasurement:
Thereareavarietyofwaystovalueanasset:
15. Historiccost‐thisisessentialoriginalcost(plusassociatedcosts)
16. Carryingamount:Depreciatedoramortisedvalueandtheimpairedvalue(byfactors
thatreducethevalueofanasset)
17. Fair value: the current market value (less disposal costs) which may mean a
revaluationupwards(optional),ordownwardsfromhistoriccostorcarryingamount.
18. Presentvalue:basedonfutureeconomicbenefits
Allmeasurementsapartfromhistoriccostinvolveestimation.
Impairment(AASB136)
Thebasicprincipleofimpairmentisthatanassetmaynotbecarriedonthestatementof
financialposition(balancesheet)aboveitsrecoverable.
Thereforeimpairmentoccursifnetcarryingamount>recoverableamount
Anyimpairmentisthenallocatedtotheasset(i.e.deductedfromitsstatementoffinancial
positionvalue),andanyimpairmentisthenallocatedtotheasset(i.edeductedfromits
statementoffinancialpositionvalue),andtheimpairmentlossrecognisedintheincome
statementwhichisa"non‐cash"expense(i.edepreciation)Examplesofimpaired
assets:
Atangibleassetwrittendownbelowitscarryingamountbecauseorareductionin
estimatedfutureeconomicbenefitsordeteriorationofphysicalstate.
Accountsreceivablewrittendowninvaluebyaprovisionfordoubtfuldebtsorforbad
debts
Inventorywrittendownbelowcostbecauseitcanonlybesoldatareducedprice(covered
byAASB102)
Propertyinvestmentswrittendowninvaluebecauseofadecreaseinretailyields.
CarryingAmount:
Thewayofcalculatingthecarryingamountofanassetwilldependonthenatureofeach
asset
Examples:
Somenon‐currentassetswithanfinitelifewillhaveacarryingamountcalculatedasinitial
costlessaccumulateddepreciation/amortisation.
Acurrentassetsuchasinventorywillbevaluedbysomeinventorymethod,basedon
original(historic)cost.
Anintangibleassetsuchasgoodwillbecalculatedaspricepaidforcompanyacquiredless
fairnetassetvaluedofthatcompany.Otherintangibleassetsarevalueddifferently.
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lOMoARcPSD|2476239
Anon‐currentassetwithaninfinitelifesuchaslandmayretainitsoriginal(historic)cost,or
berevalued.
Recoverableamount:
Higherofasset'sfairvalueorvalueinuse
Fairvalue=Netsellingamount(i.e.priceitcanbesoldfor)lessanycostsofdisposalValuein
use=Estimated(presentvalueof)cashflowsexpectedtoarisefromthecontinuinguseofan
assetandfromdisposalattheendofitsusefullife
Example:ahouseisusedasabusiness.Itsvalueinuseifitsusedforabedandbreakfastwillbe
futurecashflowsfromcustomersforthenext20yearslessrunningcostspluseventualdisposal
value.
Threestepstoimpairment
Determineifassetmeetstheimpairmenttest
Determinerecoverableamount(determinenetsellingpriceofasset/calculatevalueinuse
ofasset)
Determineifassetneedstobewrittendowninvaluei.e.impaired.
FinancialEffectofImpairment
Impairmentcanbeofanyamount;itcanbealargedollarvalue,itcanevenbereversed
e.g.ifmarketimprovedmarketconditionsindicatedimprovedeconomicbenefitsfromanasset.
•Impairmentcanturnacompany'sprofitintoaloss
•Thismudbetakenintoaccountwhenanalysingfinancialstatements,foruseddecision
making.
Inventory
InventorySystems
•Asystemneedstorecordinventoryquantityandvalue:therearetwomainsystems:
•ThePerpetualsystem:usedtoestablishinventoryforeveryitemaftereverypurchaseand
sale/use
• The Periodic system: used to establish the cost of goods sold (income statement) and
Inventoryvalue(statementoffinancialposition)attheyearendinthefinancialstatements.
InventoryValue
Withintheperpetualinventorysystemamethodisneededtorecordinventoryvalue,forevery
itemofinventoryacompanyhas:
•Therearetwomainmethods;WeightedAverageCostandFirstInFirstOut
•Thebusinesscanchooseeithermethod
•Thisisanotherexampleofestimation
•Wheninventorypurchasepriceschangeovertime,eachmethodwillgiveadifferent
inventoryvalue.ThiswillresultinadifferentCOGSvalueandhencedifferentprofitinthe
incomestatement.Itwillalsoresultinadifferentinventoryassetvalueinthestatementof
financialposition
Inventory
• AASB 102 "Inventories" and the Corporations Act requires that inventory is valued on the
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