ACCTMIS 2200 Lecture Notes - Lecture 13: Ddb Worldwide, Accelerated Depreciation, Income Statement

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fuchsiaelk478

23 Mar 2017

School

Ohio State University

Department

Accounting and Management Info

Course

ACCTMIS 2200

Professor

Marc Smith

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ACCTMIS 2200 Full Course Notes

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Account for capital expenditure made during life of the asset a) Capital expenditure: substantial in amount and occur infrequently. Cost incurred to increase the i) ii) iii) Revenue expenditure: small in amount and occur frequently. Expected useful life of asset b) i) ii) iii) Keep the asset in good working order, like ordinary repairs. Account for depreciation of buildings and equipment a) b) Need an adjusting entry every year to record depreciation. Depreciation nothing to do with value of asset. Matching concept requires that part of asset cost be expensed each year asset is used to satisfy matching of expenses to revenues. Exam 3 material page 1 iv) satisfy matching of expenses to revenues. Land does not depreciate because it doesn"t get used up d) Decrease to asset, contra-asset, normal balance credit, shown under asset being depreciated, Cost of asset - accumulated depreciation = book. Depreciation expense same in all years, so assuming use of asset equally each year h)

Related Questions

Financing Decisions

Acme Inc. is a wholesaler and distributor of electricalcomponents. The most recent draft financial statements of thebusiness revealed the following:

Income statement for the year (in millions)

Sales revenue 14.2

Opening inventories 3.2

Purchases 8.4

Goods Available for Sale 11.6

Closing inventories (3.8)

Cost of Goods Sold (7.8)

Gross profit 6.4

Administration expenses (3.0)

Distribution expenses (2.1)

Operating profit 1.3

Finance costs (0.8)

Profit before taxation 0.5

Tax (0.2)

Profit for the period 0.3

Statement of financial position as at the end of theyear (in millions)

ASSETS

Non-current assets

Property, plant and equipment

Land and buildings 4.0

Equipment 1.1

Motor vehicles 4

5.5

Current assets

Inventories 3.8

Trade receivables 2.9

Cash at bank .2

6.9

Total assets 12.4

EQUITY AND LIABILITIES

Equity

Share capital 2.1

Retained earnings 1.6

3.7

Non-current liabilities

Loan notes (secured on property) 3.9

Current liabilities

Trade payables 2.2

Short-term borrowings 2.6

4.8

Total equity and liabilities 12.4

1. Land and buildings are shown at their current market value.Equipment and motor vehicles are shown at their carrying amount(that is, cost less accumulated depreciation).

2. No dividends have been paid to ordinary shareholders for thepast three years.

In recent months, suppliers (trade payables) have been pressingfor payment. The chief executive has therefore decided to reducetheir level to an average of 40 days outstanding. To achieve this,she has decided to approach the bank with a view to increasing theoverdraft (the short-term borrowings comprise only a bankoverdraft). The business is currently paying 10 per cent a yearinterest on the overdraft.

Required:

(i) Comment on the liquidity position of the business.

(Ii) Calculate the amount of finance required to reduce tradepayables, from the level shown on the statement of financialposition, to an average of 40 days outstanding.

(iii) State, with reasons, how you consider the bank would reactto the proposal to grant an additional overdraft facility.

(iv) Identify four sources of finance (internal or external, butexcluding a bank overdraft) that may be suitable to finance thereduction in trade payables, and state, with reasons, which ofthese you consider the most appropriate.

burgundyelk45

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the âfull faith and creditâ of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartnerâs level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterpriseâs:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the companyâs performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholderâs equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

byzantiummoose662

You have obtained the followinginformation:

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Revenue	(1)	645.5	606.5

Other income	(2)	15.6	14.4

Changes in inventories		3.8	(16.4)

Cost of materials		(334.1)	(286.8)

Employee benefits expense		(91.0)	(83.9)

Depreciation	(3)	(29.8)	(23.6)

Other expenses	(4)	(116.3)	(100.6)

Interest income, net	(5)	12.3	(20.9)

Profit before tax		106.0	130.5

Income tax expense		(44.4)	(47.7)

Profit for the year		61.6	82.8

STATEMENT OF FINANCIAL POSITION AT 31DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Assets
Non-current assets
Intangible assets	(6)	47.8	40.5
Property, plant and equipment	(7)	124.5	102.5
		172.3	143.0
Current assets
Inventories	(8)	30.3	27.9
Trade receivables		73.1	50.3
Cash and cash equivalents		111.4	86.0
Total assets		387.1	307.2
Equity and liabilities
Equity		5.8	5.8
Share capital		15.3	15.3
Share premium		112.1	80.1
Retained earnings		133.2	101.2
Non-current liabilities
Provisions	(9)	160.1	121.4
Current liabilities
Trade payables		33.5	31.8
Tax		50.4	44.3
Other liabilities		9.9	8.5
Total equity and liabilities		387.1	307.2

Notes

(1)Revenue from businessactivities:

Revenue from business activities
	20X8 ($M)	20X7 ($M)
Vehicles	588.0	526.0
Parts and accessories	39.6	36.8
Other	17.9	43.7
	645.5	606.5

(2)Other income includes gains on the disposals oftangible assets and income from the reversal ofprovisions.

(3)Average number of employees:


	20X8 (Draft)	20X7 (Actual)
Wage earners	484	499
Salaried employees	483	477
Apprentices and trainees	36	37
	1,003	1,013

(4)Other expenses include costs for warranties,administration and distribution, maintenance andinsurance.

(5)Interest income, net:

	20X8 (Draft ($m)	20X7 (Actual $m)
Interest and similar income	16.8	25.1
Interest and similar expenses	(4.5)	(4.2)
	12.3	20.9

(6)Intangible assets include development costs, alsofranchises and industrial rights and licenses. During the year,$12.7 million (20X7 - $6.3 million) was spent on developing a newsports model, the Fox.

(7)Property, plant and equipment:

	Land and Buildings	Equipment	Assets under construction	Total
	$m	$m	$m	$m
Cost
1 January 20X8	61.8	212.1	19.0	292.9
Additions	5.0	28.9	9.4	43.3
Disposals	0.0	(4.5)	0.0	(4.5)
Reclassification	3.0	8.9	(11.9)	0.0
31 December 20X8	69.8	245.4	16.5	331.7

Depreciation
Current year	1.9	18.4	0.0	20.3
Accumulated	28.7	178.5	0.0	207.2

Net book value
31 December 20X8	41.1	66.9	16.5	124.5
31 December 20X7	34.9	48.6	19.0	102.5

(8)Inventories comprise:


	20X8 (Draft $m)	20X7 (Draft $m)
Raw materials, consumables and supplies	8.3	7.3
Work-in-progress	6.8	4.8
Finished goods	15.2	15.8
	30.3	27.9

(9) Provisions mainly covermanufacturing warranty, product liability and litigation risks.Also, provisions have been established for deferred maintenance andIT reorganisation

The following additional information isavailable:

(i) Pavia has achieved record sales in 20X8 with the delivery of10,153 vehicles (20X7 â 7,642 vehicles).

(ii) Although some sales are direct to individual customers themajority are ordered through dealers who take new vehicles onconsignment.

(iii) Since 1 January 20X8 Pavia has offered 0% finance forthree years on new vehicle sales in its most competitivemarkets.

(iv) The launch of the Fox has been postponed from late 20X8 toearly 20X9 as internal trials have revealed that the doors are notsufficiently secure at high speeds.

(v) A car part required for the Cipeta model is bought-inexclusively from an overseas manufacturer. Deliveries of supplieshave been unpredictable in 20X7 causing disruption to the Cipetamodel assembly schedules.

Given all of the information above you are requiredto do the following:

In respect of the financial statements audit of Pavia Co for theyear ending 31 December 20X8:

(a) Identify and explain the risks of materialmisstatement to be taken into account in planning the finalaudit.

(b) Evaluate how you might use analytical procedures to provideaudit evidence and reduce the level of detailed substantiveprocedures.

(c) Briefly describe the principal audit work to be performed inrespect of the carrying amount of the following items in thestatement of financial position.

(i) Inventories

(ii) Cash and cash equivalents

(iii) Receivables

ACCTMIS 2200 Lecture Notes - Lecture 13: Ddb Worldwide, Accelerated Depreciation, Income Statement

ACCTMIS 2200 Full Course Notes

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