Chapter 4 Flashcards
(13 cards)
Why do non-current assets need to be depreciated?
To spread the cost over its useful life, match the cost to revenue (Matching Principle), and show the true value of assets
Non-current assets lose value due to wear and tear, obsolescence, or usage.
What is the Straight-Line Method of depreciation?
It spreads the cost of the asset evenly over its useful life
Formula: Depreciation per year = (Cost of Asset - Residual Value) / Useful Life (years)
What is the formula for calculating depreciation using the Straight-Line Method?
Depreciation per year = (Cost of Asset - Residual Value) / Useful Life (years)
Example: A machine costing $10,000 with a residual value of $2,000 and a useful life of 4 years results in $2,000 depreciation per year.
How is depreciation calculated using the Reducing-Balance Method?
Depreciation = Net Book Value × Depreciation Rate
This method results in higher depreciation in earlier years.
What happens in Year 1 when using the Reducing-Balance Method for an asset costing $10,000 with a 20% depreciation rate?
Depreciation = $10,000 × 20% = $2,000, New book value = $8,000
This process continues with the new book value for subsequent years.
What are Bad Debts and Doubtful Debts?
Bad Debts are amounts customers fail to pay; Doubtful Debts may not be collected
They require provisioning to reflect realistic financial reporting.
Why do we need to provide for Bad and Doubtful Debts?
To ensure realistic financial reporting, adhere to the Matching Principle, and avoid overstated profits
Bad Debt Expense is recorded in the Income Statement.
What is included in an Adjusted Statement of Profit or Loss?
Revenue, Cost of Sales, Gross Profit, Operating Expenses, and Net Profit
Example figures: Revenue = $50,000; Net Profit = $4,500.
What does an Adjusted Statement of Financial Position show?
Assets, Liabilities, and Owner’s Equity
Example figures: Total Assets = $67,500; Total Liabilities = $23,500.
What are some limitations of a Statement of Financial Position?
Historical cost basis, omissions of intangible assets, timing differences, and reliance on estimates
It only provides a snapshot of the business at a specific moment.
Fill in the blank: The Matching Principle recognizes potential losses in the same period the _______ were made.
sales
What is the purpose of creating a Provision for Doubtful Debts?
To present a more accurate representation of accounts receivable
It is listed under ‘Accounts Receivable’ in the Balance Sheet.
What is depreciation?
allocation of the cost (depreciable amount) of the asset over its useful life
