ACCT 301 Lecture Notes - Standard Cost Accounting, Historical Cost, Share Capital

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bronzealpaca588

25 Feb 2013

School

University of Calgary

Department

Accounting

Course

ACCT 301

Professor

All

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Document Summary

Breakup valuation is based on the forced sale of individual assets in the second hand market. Basically, the current values of all assets are added up together. The disadvantages: ignores that the company is a going-concern, values on assets are estimates, sale value of fixed assets is hard to ascertain. Book value: original share capital + reserves the advantages: the figures are factual as they are based on historical cost, they are easily obtainable, the figures for debtors and non-equity liabilities are accurately reflected. Replacement cost: replacement cost of assets less: all liabilities. The disadvantages: the cooperation of the company is needed to identify assets, intangible assets such as goodwill aren"t recognized, replacement cost may overvalue the company. Earnings yield 100 = annual earnings yield x 100 or 1 x 100. The value of a company on the earnings-yield basis is the value of the stream of profit, or earnings which the company is expected to generate.

Related Questions

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1. Real estate companies would encourage the current value ofproperty and equipment being disclosed because as a company theyhelp sell and list various pieces of property. Real estatecompanies make a good amount of revenue from selling and listingproperty so therefore they understand the importance of disclosingthe amounts.

2. Hidden reserves are company's funds not placed into anaccount on the balance sheet. Hidden reserves are created byunderestimating the assets or by over accounting the liabilities tohave a lower taxable income. The advantage of having hiddenreserves is the company will not have to pay so much in taxes. Ibelieve the company disclosed their hidden reserves due to the IASBstandards coming part of the Germany accounting methods.

3. Historical cost is based on the original value it was whenfirst purchased. An appraisal value is based on the current fairmarket value. I feel companies use appraisal value when thepurchase used assets. If it was that case I wouldn't mind auditingfinancial statements with appraisal values. For the most part Iwould much rather audit financial statements with historical costbecause I can trace the numbers back to an invoice rather thanrelying on a persons opinion.

graymarten985

Discuss and answer the question regarding the case listed below in detail:

Asset Write-Ups

Rouse Company, a real estate developer, is well known as one of the few U.S. companies to have reported the current value of property and equipment in its financial statements. IAS 16 permits the inclusion of upward asset revaluations, based on appraisals, in the financial statements. And IAS 40 allows real estate companies to both record investment property in the balance sheet at its fair value and include the associated unrealized gains in the income statement.

In Germany, as in the U.S., upward revaluations are not allowed. In fact, before being replaced by IASB standards, German rules were seen as encouraging write-downs, resulting in the creation of so-called hidden reserves, which constitute a systematic understatement of assets. In March 1993, Daimler-Benz disclosed that it had hidden reserves of $2.45 billion.

1. Why might real estate companies be among the leaders in encouraging the disclosure of the current value of property and equipment?

2. If German companies have âhidden reserves,â why do you think Daimler-Benz chose to reveal the magnitude of its hidden reserves in March 1993? What is the advantage of having hidden reserves?

3. As an auditor, how would you feel about auditing the financial statements of a company that uses appraisal values instead of historical costs?

orchidyak473

QUESTION 3 30 MARKS

Namic Inclusive CC is currently preparing budgets for the three months of the trading year. You have been provided with the following information:

Trading;

January February March Sales in Units 50 000 units 55 000 units 60 000 units

Sales are expected to increase to 75 000 units per month from 1 April as the company increases production capacity. The selling price for each unit has been set at N$90.00 per unit. All sales are on credit. 30% of sales is received in the month that the sale is made and the balance is received in the following month.

The following notes were also presented.

1. The cost of raw material for each unit of production is N$ 30.00. Namic inclusive cc holds a closing stock equal to 40% of raw material required for the next month`s production. Raw material is paid in the month following the purchase.

2. The company values closing stock of units produced on a variable costing basis. Company policy is to hold a maximum of 20% of finished units required for sales in the forthcoming month as closing stock.

3. Labour cost of production are variable at N$ 20.00 per unit. All costs are paid in the month incurred.

4. Other manufacturing overhead are N$ 8.00 per unit variable and N$ 12.00 per unit fixed. The fixed component is based on a production level of 55 000 units per month. Depreciation amounting to N$ 30 000.00 per month is included in this figure. All overheads are paid for the in the month incurred.

5. Other company costs excluding interest payable amount to N$ 5.00 variable per unit sold and further N$ 250 000.00 fixed per month. These costs are paid for in the month incurred.

Page 11 of 12

Statement of Financial Position as at 01 January 2017

Issued Share Capital N$ 10 000 000 Accumulated Profit N$ 1 517 000 N$ 11 517 000 Fixed Assets Land and Building N$ 5 000 000 Machinery and equipment N$ 2 750 000 Other Assets N$ 1 000 000 Current Assets Stock â Raw Material N$ 612 000 Stock â Finished goods N$ 580 000 Debtors â Sales N$ 2 835 000 Cash and Bank N$ 180 000 Less: Current Liabilities Creditors â Raw Material N$ 1 440 000 N$ 11 517 000

The company will raise long term loan on the 01 February 2017 for N$ 500 000 at an annual interest rate of 12% payable monthly as incurred. The interest charge has not been included in the information provided above. Interest is paid in the month after it is incurred.

Machinery costing N$ 350 000 will be purchased on 01 March 2017, monthly depreciation on the asset is budgeted to be N$ 5000.00 per month. The depreciation has not been accounted for in the information provided above.

REQUIRED:

3.1 Prepare a sales budget (3) 3.2 Prepare a production budget (4) 3.3 Indicate the closing value of debtors and closing stock for the months of January to march 2017 inclusive (3) 3.4 Prepare a material purchases budget by units as well as in value also indicate the closing creditors budget for each month of January to March 2017 (10) 3.5 Prepare a cash budget for each month of January to March 2017 inclusive (10)

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ACCT 301 Lecture Notes - Standard Cost Accounting, Historical Cost, Share Capital

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