Week 5 Flashcards
(27 cards)
What are non-current assets?
Long-term in nature, expected to contribute to income generation for more than one year, and have an indirect relationship with trading activities.
Sub-categories include intangible, tangible, and financial (long-term, investments held) assets.
What defines current assets?
Short-term in nature, convertible into cash in less than one year, and usually relate directly to trading activities.
Sub-categories include inventories, trade receivables, and cash.
How is the initial value of a non-current asset recorded in the Statement of Financial Position?
At the Historical Cost of the asset, which includes the purchase price and costs related to bringing the asset to its working condition and location.
Costs may include site preparation, delivery, installation, and professional fees.
How is a non-current asset recorded when acquired?
Dr: Non-current asset £xxx, Cr: Cash/payables £xxx.
What are the two methods to adjust the value of non-current assets in subsequent years?
- Revaluation model
- Cost model
What is the revaluation model?
Recording the fair value (market value) of the assets in the year when making the balance sheet.
What is the cost model?
Depreciating the assets in subsequent years and reducing the value of the assets in the balance sheet.
Why is inflation a concern for non-current assets?
It results in the cost of non-current assets acquired several years ago being out-of-date, particularly for long-term assets like land and buildings.
What does IAS16 allow regarding non-current assets?
It allows the revaluation of non-current assets to fair value, requiring all assets of that type to be revalued regularly.
What is depreciation?
The systematic allocation of the depreciable amount of an asset over its useful economic life.
What is the formula for calculating annual depreciation?
Annual amount of depreciation = the amount of the total cost of a non-current asset used up during the year.
What is the net book value (NBV) in the balance sheet?
The historical cost minus the total accumulated depreciation.
What is the depreciable amount of an asset?
The cost of an asset less its expected residual value.
What is residual value?
The estimated disposal proceeds at the end of the asset’s useful life.
Why are assets not re-valued each year?
Because of depreciation.
Is depreciation an expense with a cash effect?
False.
What data is needed to calculate depreciation?
- Historical cost
- Length of the asset’s expected economic life
- Estimated residual value
- Method of calculating depreciation (e.g., Straight line, reducing balance, sum of digits)
What is the straight line method of depreciation?
Depreciation = (Original cost - estimated residual value) divided by estimated useful life (years).
When is the straight line method appropriate?
- For assets depleted by the passage of time (e.g., buildings, leases)
- Where asset utilization is the same each year (e.g., plant & machinery)
- It is easy to understand and simple to calculate.
What are the disadvantages of the straight line method?
It may not give an accurate measure of the loss in value or reduction in useful life.
What is the reducing balance method?
Applies a constant percentage depreciation rate each period to the asset’s net book value at the end of the previous period.
What is the formula for annual depreciation expense in the reducing balance method?
Annual depreciation expense = Opening balance NBV * r.
When is the reducing balance method most appropriate?
- For assets that deteriorate due to usage, especially in earlier years (e.g., motor vehicles).
- Where utilization is the same in each year.
What are the disadvantages of the reducing balance method?
It contains an arbitrary assumption about the rate of declining value and is relatively complex.
