QUIZ 2

The primary objective of depreciation is to match expense to revenue

Depreciation is distribution of total cost of an asset over its useful life.

Depreciable asset

• Is held by an enterprise for use in the production or supply of goods and services
• Is not meant for sale in ordinary course of business
• Is expected to be used during more than one accounting period
• Has limited useful life

Residual value is the value realized at the end of useful life of machinery

Useful life is the period over which the asset is expected to be used or similar units expected to be obtained from the use of the item.

Useful life is affected by the number of shifts used.

If estimated useful life is insignificant, then the value will be nill.

Methods of depreciation

• Straightline method
• WDV method
• sum-of-the-years digits method
• The production-units method

WDV and sum-of-the-years digits method are accelerated methods.

WDV is also known as diminishing-balance method

Accelerated methods are more consistent to the matching principle.

Do not forget to remember the formulaes of WDV , Straight line method, SUM-OF-DIGITS and Production units method.

Straight line method is the simplest

When output of asset fluctuates, production-units method is a better choice.

pro rata depreciation - When an asset is purchased during an accounting period, depreciation for the period is computed proportionate to the period it is held.

WDV rates are higher in initial years and gradually it reduces.

WDV has a time value

Depreciation method can be changed if

• Change is required to comply with provisions of any AS
• Change is required to comply with a statute
• Change is necessary for better presentation of the financial statement

Working capital = Current liability - Current asset

Depreciation is above the line item

Depreciation is

• A historical cost
• Depends on past experience and judgement

Recording

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Inventory Valuation

Inventories consist of assets held

1. For Sale
2. Raw material and W.I.P
3. In the form of materials or supplies to be consumed in the production process stores,spares,consumables,raw material

AS-2 does not cover

(a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Accounting for Construction Contracts);
(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries.

Inventory valuation affects

• Gross profit
• Net profit
• Opening stock/Closing stock
• Shareholder's equity

Cost of inventory includes

1. Cost of purchase
2. Cost of conversion
3. Other costs incurred in bringing the inventories to their present location and condition.

Cost Formulas

1. Special Identification method
2. FIFO
3. LIFO

Normal capacity - Production expected to be achieved over a period of years under normal circumstances taking into account loss of capacity which results because of plant maintenance.

In case of low production allocation for fixed production overhead per unit of output shall not increase

In case of over production allocation for fixed overhead per unit of output shall decrease.

Recording

Assets+Expenses+Dividend = Liabilities+Capital+Revenue

Account is a statement for which you collect information

Carrying cost is the cost at which the asset is carried

Recoverable cost = Higher of Net Selling Price and Value in use

P&L,Balance Sheet and Trial balance - Period 2

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P&L,Balance Sheet and Trial balance - Period 1

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Points - for resolving the assignment

Please go to this link to find out which account goes where.

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Please note that closing stock is not written in trial balance. See the answer below from WikiAnswers.

Question: Why is closing stock not written in the trial balance but always written below the trial balance?

Ans :

closing stock in trial balance

The reason why closing stock is not taken into account in a trial balance is because a trial balance is a balance of all ledger account a given point in time.It records only transactions which have a two way effect for EG:Purchases where goods are bought against cash or credit and sales where goods are sold against cash or credit..But closing stock is not a transaction having a two way effect any given point in time.It is only an indication of the goods lying in the factory at the end of the year.It is therefore showed below the trial balance and not in the trial balance.However in order to derive at the exact gross profit the closing stock is taken into consideration in the trading account and also appears as an asset in the balancesheet.In some case the closing stock appears as an adjusted purchase account in the trial balance and in this case it does not appear in the trading account but appears only in the balance sheet.

In our assignment we will have to include the closing stock as an asset in the balance sheet and reduce the cost of the closing stock from the total cost of goods(timber) sold.

Debits and Credits

Click the link below and learn about T-Accounts, debits and credits

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Quiz 1 - Sample questions

What is the language of business

Accounting is a ........
Ans : Information system

What is the end function of accounting
Ans : Reporting

What is asset, liability, equity
Asset - Assets are resources controlled by an organization from which future economic benefits will flow

Liability - Liabilities are present obligation because of past events

Equity - It is the owner's residual interest in the assets of an enterprise after deducting all its liabilities.

Below are asset accounts

Land
Buildings
Equipment
Prepaid expenses
Sundry debtors
Bills receivable
Cash

Below are liability accounts

Bills payable
Sundry creditors
Unearned revenues
Other short-term liabilities(Wages Payable,Income tax payable,Interest payable, and Dividends payable)
Long-term liabilities

Below are owner's equity accounts

Share capital
Retained earnings
Revenue and expense accounts
Drawings
Dividends

What is expense

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
All expenses are divided into operational, capital, and financial ones.
Examples:
Operational expense (OPEX)—salary for employees
Capital expenditure (CAPEX)—buying equipment
Financial expense—interest expense for loans and bonds

What are the different branches of accounting

Financial accounting - It is the preparation and communication of financial information mainly for those outside the organisation

Management accounting - It is the preparation and communication of financial and other information for the internal use of management

Cost accounting - is the collation of data for inventory valuation

What are the components of financial statement

Balance sheet - Statement of financial position
Income statement(also called a Profit and loss Statement) - Statement of financial performance
Cash Flow statement - Statement of cash receipts and cash payments
Notes to Accounts and Accounting policies

Who are the users of financial statements

Present and potential investiors
Employees
Lenders
Security Analysts and Advisers
Suppliers and creditors
Customers
Governments and regulatory agencies
Public
Management

What are the assumptions underlying preparation of financial statements

Accounting entity
Going concern
Money measurement
Periodicity

What are different types of accounting methods

Cash Basis - Cash-basis accounting is a method of bookkeeping that records financial events based on cash flows and cash position. Revenue is recognized when cash is received and expense is recognized when cash is paid. In cash-basis accounting, revenues and expenses are also called cash receipts and cash payments.
Accrual basis - The effects of transactions and other events are recognised when they occur and reported in the financial statements of the period to which they relate

What are the qualitative characteristics of financial statements

Understandability
Relevance
Materiality
Reliability
Faithful representation
Substance over form
Neutrality
Prudence
Completeness
Comparability

What is operating activity,Investing activity and financing activity

Operating activity - The principal revenue producing activity
Investing activity - Refers to acquisition and disposal of long-term assets and other investments
Financing activity - Those activities that result in changes in the size and composition of the owner's capital including preference capital

What is capital and revenue expenditure

Ans : Capital expenditure are expenditures creating future benefits. Expenditure for the purchase or expansion of fixed assets are capital expenditures
1. Expenditure that extend useful life ,improve the quality of output,or reduce operating costs of an existing fixed asset.
2. acquiring fixed asset
3. bringing them into business
4. legal costs of buying buildings
5. carriage inwards on machinery bought
6. any other cost needed for a fixed asset ready for use

Ans: Expenditures for ordinary repairs,maintenance,fuel,insurance,eqipment are called revenue expenditure . They are debited into expense accounts. Revenue expenditures are charged to the income of the period in which they are incurred because benefits from these expenditures do no last beyond the current accounting period.

Capital expenditure goes to asset account
Revenue expenditure goes to expense account

What is matching principle
Ans:
Revenues have to be matched and correlated with all the expenses of a particular year
In other words,profit is determined after charging the expenses of a period with the revenues earned in the same period

What is historical cost,current cost,fair market value,realisable cost,present value

Histroical cost - is the original monetory value of an economic item.
Current cost - The cash or equivalent that would have to be paid for a current acquisition of the same or an equivalent asset. Current cost is the valuation measurement used most for inventories.
Fair Market value - The cash or equivalent realizable by selling an asset in an orderly liquidation. Fair market value is the valuation measurement requirement for marketable securities.
Realisable cost - The cash or equivalent expected to be received for an asset in the due course of business, less reasonable further costs to make the item ready for sale, including allowances for uncollectibles. Net realizable value is the valuation measurement used most for short-term receivable and some inventories.
Present value - The value of an amount today of some future payment to be paid or received later, discounted at some interest rate. Present value is the valuation measurement used most for long-term receivables.

What is capital and capital maintenance
Ans: The concept of capital gives rise to the following concepts.
Financial capital maintenance - Under this concept a profit is earned only if the financial(or money) amount of the net assets at the end of the period exceeds the financial(or money) amount of net assets at the beginning of the period, after excluding any distributions to,and contributions from,owners during the period. Financial capital maintenance can be measured in either monetary units or units of constant purchasing power.
Physical Capital Maintenance - Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the enterprise(or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period , after excluding any distributions to,and contributions from owners during the period.