Non Current Assets and BDA Flashcards
(16 cards)
Why do we depreciate non-current assets?
A non-current asset isn’t entirely consumed in one reporting period. Depreciation is an attempt to calculate how much of the asset’s value has been consumed in the current Reporting Period.
How does the straight-line method of depreciation work?
The assumption made is that the asset being depreciated will contribute evenly to revenue, doing the same job when it is old as when it is new.
How does the straight-line method allocate expense?
Depreciation expense is the same each year because it is calculated as a percentage of the historical cost.
How does the reducing balance method work?
The assumption being made is that the asset being depreciated has moving parts and is therefore more likely to be more efficient and productive when it is new, and so contributes more to revenue at the start of its useful life than at its end.
How does the reducing balance method allocate expense?
The reducing balance method calculates depreciation expense as a percentage of the carrying value of the asset. Therefore, as the asset ages, its contribution to revenue decreases and so too does the depreciation expense.
Explain the importance of choosing an appropriate method of depreciation.
It will ensure that a more accurate net profit is determined by matching the cost of the asset consumed against the revenue is assisted in earning in the reporting period. This will also improve decision-making in relation to profit and asset management.
Discuss the changing of depreciation methods on a non-current asset.
The consistency principle requires that the same depreciation method be used from one reporting period to the next so that reports are comparable. Changing accounting methods will mean that reports will not be able to be compared from one reporting period to another, breaching comparability as it will be unclear whether changes over reporting periods are the result of changes in financial performance or simply changes in accounting methods.
However, if a change in depreciation methods will result in a more accurate representation of the asset’s pattern of use and contribution to revenue earning, then changing depreciation methods is possible, but the change must be clearly disclosed in the firm’s financial reports.
Explain how the method of depreciation affects total depreciation over the life of the asset.
Although each method gives a different depreciation expense in each reporting period, both methods will (if the rates have been calculated accurately) calculate the same total depreciation expense over the life of the asset.
Explain how choosing the reducing balance method over the straight-line method will affect net profit.
Net profit will be lower under the reducing balance method in the earlier years of the life of the asset because the depreciation expense will be higher in its earlier life. This is because the reducing balance method allocates more depreciation expense at the start of the asset’s life when it is newer and can contribute more to revenue. In the later years of the asset’s life, profit will be higher because the reducing balance method will allocate a lower amount than the straight-line method.
Why could there be profit on the disposal of a non-current asset?
The reason is over-depreciation. That is, the residual value and/or useful life was understated possibly due to: the asset being in a better condition than expected, higher demands for the asset than expected, or simply poor estimates.
Why could there be a loss on the disposal of a non-current asset?
The reason is under-depreciation. That is, the residual value and/or the useful life was overstated possibly due to: the asset being damaged, an outdated asset which was superseded by a newer model, the asset was no longer in demand, or simply poor estimates.
What is the purpose of balance day adjustments?
Balance day adjustments enable revenues and expenses to be attributed to the period to which they are earned or incurred, regardless of when they are received or paid. This ensures that profit is calculated accurately by comparing revenue earned against expenses incurred in the current reporting period.
Explain the impact of accrued revenue on the balance sheet.
Accrued revenue is a current asset as it is a resource controlled by the entity which will bring a future economic benefit in the next 12 months when the [revenue] is received.
Explain the impact of prepaid revenue in the balance sheet.
Prepaid revenue is a current liability as it is a present obligation of the entity as a result of past events that is expected to result in and outflow of economic benefits in the next 12 months when the good/service is supplied.
Why would a stock writedown occur?
In some situations the selling price of the stock will fall below the cost price of the stock and instead of generating a profit on the sale, it is probable that a loss will occur. E.g. If the stock is damaged it may be sold for less than its cost price and continuing to value the stock at its original cost would breach conservatism as: it would not recognise the loss that is probable, and it would overstate the asset (stock) in the balance sheet.
Explain how stock writedown assists relevance.
Stock writedown upholds relevance as it provides a more realistic valuation of stock in the balance sheet as well as a more accurate net profit in the income statement and this information in reports will be more useful for decision-making.
