Week 6 - Preparing Income Statement Flashcards
(29 cards)
What is inventory costing?
Where a firm determines the cost of goods sold during the period and the cost of goods remaining at the end of the period.
What are the three most common methods of costing inventories?
First In First Out (FIFO) - goods bought first are sold first
AVCO (weighted average cost) - weighted average cost of the inventory held (after inventory acquisition takes place)
Last In Last Out (LILO) - Goods bought last are sold first (not allowed under IFRS)
What is an intangible asset?
An identifiable non-monetary asset without physical substance.
What are the characteristics of an intangible asset?
- Identifiable - and it is so if it is either:
* Separable - capable of being separated and sold, licences, transferred, exchanged or rented separately, without selling the whole business
or
* Arises from contractual or other legal rights
Must also fulfill the recognition criteria for an asset - Control
- Economic Benefits
- For any item to be recognised in financial statements, its cost or value must be measurable with sufficient reliability.
How may a firm acquire an intangible asset?
- Separate acquisition
- Acquisition as part of a business
- Internally generated intangibles
What is meant by separate acquisition and what may it be used for?
This is when the cost can be measured and so measured=price paid. It is identifiable, since it could be bought/sold. The purchase transaction suggests that there is an indication future economic benefits are probable. The purchaser now has control over the asset.
What is meant by acquisition as part of a business and what may it be used for?
This is when a firm buys another firm and the intangible assets owned by the firm that is purchased are now owned by the purchasers. When a company buys another company and they produce a combined balance sheet, they have to include intangible assets (like brand names or customer lists) in the balance sheet, even if the company they bought didn’t recognise these intangibles in their separate balance sheet. Trademarks / brands are recorded as intangible assets ONLY if they are purchased.
Used to acquire an intangible asset.
What are internally generated intangibles and what may they be used for?
Only recognised if their cost can be reliably measured and probable that expected future benefits will flow into the business. This can be difficult if the intangible assets are internally generated.
For research and development Research phase costs shall be expensed (since at this stage its difficult to demonstrate that further economic benefits will flow).
Development phase costs are capitalised provided that certain criteria’s are met.
Used to acquire an intangible asset.
How are intangible assets subsequently measured (two methods) and under which conditions would you pick which one?
Cost: Identical to PPE: an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses.
Revaluation Model: The model can only be applied if there is an active market for that type of intangible asset
How are intangible assets amortalised (two methods) and under which conditions would you pick the one to use?
If asset has a finite life: ▪ Amortise the asset over its useful economic life
▪ Residual value is presumed zero
unless someone has agreed to buy it or there is an active second-hand
market
If asset has an indefinite UEL: ▪ Do not amortise, instead perform an
annual impairment review
How would owners equity in a sole trader be calculated?
Capital introduced + Profit - Drawings
How would owners equity be shared in partnerships?
They will have a partnership agreement which will include how partners will share profits and losses. The law will assume that net income is to be divided among the partners proportionately to the capital contributed.
The partners receive:
A) a stated salary, or a stated percentage of interest on the capital contributed, or a combination of both
B) a stated share of residual profit after salaries
Owners equity in limited corporations?
In this order
Share capital
Share premium
Retained earnings
What is the nominal (par) value of shares?
Value of shares determined at IPO
What are ordinary shares?
The basic unit of ownership.
How is share premium calculated and what is it?
▪ The price of a share differs from
its nominal value afterwards
▪ At subsequent offerings shares
are sold at market value
▪ Difference between market value
and nominal value at the time of
issue =share premium
What are the characteristics of ordinary shares?
- Basic form of finance
- If the business closes down, the ordinary shareholders receive proceeds
after lenders, creditors and preference shareholders - Ordinary shareholders have voting rights
- Ordinary shareholders benefit from dividends and appreciation of
share market price
HIGH RISK HIGH RETURN
What are preference shares and their characteristics?
▪ Fixed rate of dividend each year
▪ Preference dividends are paid before ordinary dividends
▪ Where a business is closed down, preference shareholders have priority
over the claims of ordinary shareholders
▪ Preference shares do not have voting rights
SUMMARY: LOW RISK, LOW RETURN
What are revenue (distributable) reserves?
Retained earnings: increase through profits and decrease when earnings are distributed to shareholders or when the entity makes losses. Retained for
reinvestment.
What are dividends?
Dividends represent drawings by the shareholders of the company
What are the two types of dividends?
Interim dividend and final dividends
What is an interim dividend?
An interim dividend is paid halfway through the accounting year, when the profit for the first six months is known. The amount is decided by the directors.
What is a final dividend?
An interim dividend is paid halfway through the accounting year, when the profit for the first six months is known. The amount is decided by the directors.
How would you record a dividend in a double entry?
Interim dividend declared
Dr Dividends payable (current liability, SOFP)
Cr Bank
Interim dividend paid
Dr Dividends*
Cr Dividends payable (current liability, SOFP)
