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Lecture 6 notes Flashcards

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1
Q

What have we learnt in last couple weeks?

A

Valuing current assets Valuing non current assets tangible ( PPE inital, depreciation and disposals, revaluation, upward impairment)

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2
Q

What are we going to do today?

A

Valuing intangible non- current assets Equity section of SOFP Inventory, inital valuation, write-down valuation methods Sources of finance

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3
Q

What does Intangible mean?

A

You cannot touch or feel

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4
Q

Give examples of intangible assets?

A

Patents

Copyrights

Brands

Market share

Customer loyalty

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5
Q

What did we say earlier in previous lectures about intangible assets?

A

If you cannot be noted down in monetary terms, we cannot note it down, but now we will see when we can note it down and when we cannot.

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6
Q

For an intangible asset to be recognised as an intangible asset what 2 criteria must be derive?

A

1) Identifiable ( or separable)
2) Controlled by an entity

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7
Q

What does Identifiable mean as aa criteria for an asset to be intangible?

A

You should be able to sell it rent it, it should not be part of something else.

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8
Q

What does Controlled by an entity

A

The company must have full ownership of the asset, e,g, if you hire another company to do some research for you, and that company owns a patent, you will not be able to include that payment in your SOFP. You need to have control over it.

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9
Q

When are Intangible assets shown on the Statement of financial position?

A

An intangible asset is shown on the Statement of Financial Position only if the rights to some benefits are purchased.

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10
Q

When are intangible assets not shown on the statement of financial position?

A

Equally valuable assets may be created by internal expenditures, but they are rarely recognised as assets.

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11
Q

Give an example of a intangible asset being in the income statement and not being in the statement of financial position?

A

For example, suppose Winter Plc spends £5 million to internally develop and patent a new drug. Winter would charge £5 million to expense; no asset would be recognised. If Winter Plc had paid £5 million to another company for its patent, it would record the amount paid as an intangible asset

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12
Q

When will trade marks be recorded as intangible assets?

A

Only if they are purchased

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13
Q

Despite MacDonald’s and coca cola spend huge amounts of money on advertising and creating public awareness of their brands, does it show on the SOFP as an intangible asset?

A

It shows no intangible assets even though their brands are extremely valuable.

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14
Q

What is Good will?

A

It is an intangible asset, goodwill is the difference between what a company pays to buy an accquistion target, and what the accquired company is worth on paper.

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15
Q

Why do firms pay for good will?

A

You get brand value, employees etc, so you get the product as well as something else.

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16
Q

What is the Double entry for Good will?

A

Dr Net assets accquired (A-L)

Dr Goodwill account ( non-current asset)

Cr cash paid/ share issued.

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17
Q

What is an important thing to remember about Good will?

A

Goodwill is recognised as an asset in the acquirers’ accounts only after an acquisition e.g. Google acquires a small software company, google has paid extra goodwill, this is only recognised in Googles financial statement, not in the financial statements of the small software company.

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18
Q

( Subsequent measurement) After intial recognition of an intangible asset, how do you work out its net book value?

A

Cost or revalued amount - accumulated amortisation - accumulated impairment loss.

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19
Q

What is Accumulated amortisation?

A

Depreciation for an intangible asset.

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20
Q

How does the depreciable amount depend on whether the asset has a finite useful life or a infinite useful life?

A

If the asset is finite useful life, the depreciable amount should be allocated on a symmetric basis over the best estimate of useful economic life ( usually termed as amortization expense) If the intangible asset as a infinite useful life, it is only subject to impairment and not depreciated ( you cannot apply amortization

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21
Q

Company ABC has created a huge brand recognition through advertising. The cost of advertising is £100,000. The expected benefits is £5 million. What will be the value of the intangible asset – “brand value”

A) 100000

b) 5 million
c) 4,900,000

D) 0

A

D) 0 The brand recognition is internally generated not purchased, you don’t note down intangible assets like brand value when its internally generated.

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22
Q

Firm ABC acquired a permanent trademark from another firm. The accountant tells the CEO that they should amortise this intangible asset every year. Is the accountant correct? A) Yes B) No

A

B) This is no because to depreciate it must be a finite useful life asset. The word permanent implies infinite useful life, so you can’t amortise.

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23
Q

So Till now we were told the open opening inventory, what was the purchases and what was the closing inventory but how do we know the value of closing inventoy to come up with the cost of sales. What is the Cost of sales?

A

When goods are sold, their cost becomes an expense, ‘cost of sales’ Cost of sales = opening inventory + purchases - purchase returns - closing inventory

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24
Q

Lets consider you have 4 televisions 1) 100 2) 130 3) 150 4) 160 What is the Cost of goods sold it the first 2 are sold and what is the remaining inventory?

A

1) 100 + 130 = 230 cost of goods sold Closing inventory is 150 + 160 = £310.

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25
However lets say the company has 500000 televisions an cannot track individually how much each tv costs e.g. rice seller doesn't tag each price pack with a tag, how do you calculate COS and closing inventory?
FIFO ( First in first out) LIFO ( Last in First out) WAC ( weighted average cost)
26
What is First in First out?
Goods bought or produced first are sold first e.g. if you brought something in Jan Feb and March, the assumption here is that you would always sell the Jan goods first, Feb next and March last.
27
What is Last In First Out?
Goods bought or produced last are sold first e.g. if your brought something in Jan Feb and March, the assumption here is that you would always sell the March good First, then Feb then Jan.
28
What is Weighted average cost?
goods entering the business lose their separate identity. Find the average costs of all the costs of all the goods brought in Jan Feb and march, you take AC then calculate COS and Closing inventory.
29
An enterprise that supplies coal to factories has the following transcations during a period. Work out FIFO for cost of sales and Closing inventory?
30
An enterprise that supplies coal to factories has the following transcations during a period Using LIFO calculate COS and closing inventory
31
An enterprise that supplies coal to factories has the following transcations during a period Using WAC calculate COS and closing inventory
32
What conclusion can you make by looking at all of the 3 methods?
Depending on the assumption the Gross profit changes.
33
How can managers missue the 3 methods? LIFO, FIFO AND WAC
They calculate using all 3 methods and say they are getting the least COS in this particular period, so will use a method with higher COS in that particular period, which you can do according to accounting standards but this loses its comparability with other firms.
34
So what should firms do to enable comparability?
They should match the method usedd by the whole industry and when they shift methods they should provide an explanation on why they have done this.
35
Which method is not permitted by the IFRS? and why?
LIFO this is because you sell the product you brought most recently, so the historic cost in inflationary times could be increasing, meaning they show a higher cost of sales, so there tax bill will be lower.
36
Mythili enterprise has beginning inventory valued at 50kg at £10 per kg. The company buys 100kg of rice at £10 per kg on 1 st March and 120 kg of rice at £7 per kg on 1 st June. The ending inventory was 90 kg. Calculate value of COS using FIFO A) 1,210 b) 1710 c) 1,440 D) insufficient info
B) 1710
37
What are 2 sources of finances for firms?
Internal ( Owners equity) and External ( Loans)
38
What are 3 types of business entities?
Sole traders, Patnerships and Limited liabilities
39
How does the owners equity look on a balance sheet for a sole trader?
Capital introduced ( this isn't doesn't change) Net profit for the year ( Income statmement) Deduct drawings = Closing capital
40
Owners Equity in a sole trader On 1 January 2012, Anthony decided to set up in business. He introduced £50,000, which was put in a bank account. He took an 18 month lease of a shop. The business generated a profit of £307,920. The amount of personal drawings made by Anthony during 2012 was £117,920. How would this look on the SOFP?
41
Does the Statement of financial position equity section look the same for a Patnership?
No
42
What is a Patnership agreement?
The partnership agreement provides how partners will share profits and losses. The law assumes that net income is to be divided among patners proportionally to the capital contributed.
43
What two things do Partners receive?
A) A stated salary or a stated percentage of interest on the capital contriubuted or a combination of both ( you pay salary because some of these patners are operational patners meaning they come into work everyday, this is their primary job. b) If there is any profit remaining then you which is called residual profit, you split this into the ratio of the patnership agreement.
44
What are salaries or interest payments equivalent to in solel traders equity section?
Salaries or interest payments to the partners are equivalent to drawings by sole traders
45
Before splitting profit into patners, what should you always do first?
You calculate profit before splitting into patners ( I/S)
46
When you are splitting profit amongst patners, what must you do?
You must create an appropriation of profit for that period,
47
Looking at this example create an Appropriation of Profit?
1) As you can see, you pay interest 2) pay salaries 3) The remainin residual profit is split into the 3 using patnership agreement. IE 40,600 - 25000 = 15600 ( you split that with the patnership agreement. The total gives you the total profit share of the 3.
48
How does the capital section look on the statement of financial position?
You transfer the total profit share into the statement of financial position, 14600 13600 and 12400. . So you always have Opening capital + Profit share - Drawings = Closing capital
49
What are the 2 types of limited companies?
Public limited companies ( PLC) ( shares offered to the public) Private limitied companies (LTD) (shares privately held e.g. family company)
50
What are the shares offered by public companies called?
Ordinary shares e.g. stock exchange, if you say you have 1 share of M&S this means you have 1 ordinary share of M&S. It is a basic unit of ownership.
51
What is the Nominal ( par) value of shares?
Determined at inital public offering( IPO the very first time the company lists itself on the stock market, ) The prices are set quite minally which is called Nominal value.
52
Why is it overtime the market price of shares is higher than the Nominal value of shares?
This is because more and more investors are buying shares, as they think the company will do well in future so price goes up.
53
What is it called when the when you pay extra for the share which is higher than nominal value of share?
Share premium.
54
What is the definition of Share premium?
Difference between market value and nominal value
55
ABC incorporates and issues 250,000 ordinary shares having a par value of £1 each. If at the end of the first year the company has generated £75,000 profit, this must be reflected by an increase in owners’ equity. How would this look on SOFP equity section?
56
Why does 250000 get Dr on cash and cash equivalents?
1 X 250000 = 250000 you got paid cash, so this is called SHARE capital.
57
So what is the difference between the equity section and sole trader equity section? What is the double entry for this example?
This is simlar to sole trader but the difference here is that capital is called share capital. So you Dr Cash £250000 CR share capital - £250000
58
. After five years, ABC issues 150,000 new shares (par value of £1) at £3. continous from previous. What is share premium and what is the double entries.
Dr Cash 450000 Share capital = 150000 Share Premimum £300000
59
What are 2 types of shares?
Preference and Ordinary shares
60
What is a Preference share?
reference shares represent an ownership stake in a company, (Ordinary shareholders receive their share of capital after the preference shareholders are paid.)
61
What is the key difference between Ordinary and Preference shares?
Preference shares receives dividiend regardless if profit or loss is made,its fixed, whereas Ordinary shareholders get dividends when profit is made ( it is not guranteed )
62
What is another key difference between Preference shareholders and Ordinary shareholders?
Ordinary shareholders have voting rights, whereas preference shareholders do not have voitng rights, Having voting rights allows you to change ceo or operating policies of the company.
63
Why are ordinary shares known to be high risk high reward shares?
Lets assume a compnay does exceptionally well, its profit has gone up by 200%, if from a preference shareholder perspective it doesn't matter because they still get a fixed percentage as a dividend, but for a ordinary shareholder, you can get an expectional dividend or stock price goes off, so you cna sell it on stock market for a high price. So preference is low risk, low return.
64
What are 2 types of reserves in the equity section?
Capital ( Undistributable ) reserves ( you cannot use this to distrubute dividends) Revenue ( Distrubtable) reserves ( you can use this to distrubute dividends)
65
What are examples of Capital reserves that cannot be distrubted?
Share premminum ( when shares are issued above their par values or nominal) Revaluation reserve ( such as upward revaluation of non-current asseet)
66
What are examples of Revenue reserves that can be distrubted?
Retained Earnings : increase through profits and decrease when earnings are distributed to shareholders or when the entity makes losses. Retained for reinvestment
67
Remember incase you forget Net profit always goes in RE for a sole trader in equity section? True or false.
TRUE
68
How are preference and Ordinary shares declared?
They are declared out of the profits after taxation.
69
Will Ordinary dividends and Preference dividends be shown on the income statemement?
No as dividends are not a business expense
70
So when you pay a dividend what is the double entry for it?
You decrease cash and retained earnings. DR Dividend (- Retained earnings SOFP) CR cash ( - current asset)
71
What is the double entry when the dividend is approved but not paid for?
DR dividend ( - RE SOFP) CR Dividend payable ( + Current liabilities)

AC100 (10 decks)

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